Leverage Example
Your leverage can be increased further by opening your position with a Stop Order. When you attach a Stop Order, your margin requirement decreases because you are effectively reducing your level of risk. The closer the Stop is to the current market level, the less your margin requirement and hence the greater your leverage will be.
This is calculated as follows:
Required Stop Margin = Stop pips distance away from open position * $ change per pip of position + “Slippage Factor”
Slippage Factor = 5% of the original margin deposit for the position without a stop
Say you buy ten contracts of EUR/USD (the equivalent of E1,000,000) at 1.5500 without a Stop. The margin to open this position will be 2% x E1,000,000 = E20,000 ($31,000).
For this position your leverage ratio is 50:1, in that for an initial outlay of E20,000 you are gaining a position value of E1,000,000. The degree of leverage on your trading capital is calculated as 1,000,000/20,000 = 50. Hence 50:1.
If, however, you open the same position with a Stop placed 5 pips away (1.54950) from the opening price at 1.5500, your margin will be reduced to just E1322 ($2049).
Therefore your position value (E1,000,000) is now an incredible 756 times your initial capital (E1322). So your leverage ratio has now risen to 756:1.
Without proper risk management, of course, a high degree of leverage can lead to large losses as well as gains.
Explanation
In the example above the Stop Margin Calculation is as follows:
Stop distance from original position = 5 pips
The dollar amount change per 1 pip movement of the position = $100 (see Contract Details for more info)
Slippage Factor = 5% of the original margin deposit for the position without a stop (i.e. E20,000 or $31,000)
Required Margin = (5*$100) + ($31,000*0.05) = $2,049
Conversion = $2,049/1.5495 = E1,322
*A stop order may not limit your risk in times of rapid market movement. In such cases the market may move through your stop in which case your order will be filled at the best available price.