Margin trading (margin trading) is a way of making trades in which the trader uses not only their own funds but also capital provided by the exchange or broker. The collateral deposited by the trader is called margin, and the ratio of the position size to their own funds is called leverage. Leverage can be expressed as 2:1, 5:1, 20:1 and higher: the greater it is, the larger the position that can be opened for the same amount of own capital.
How it works
Borrowed funds make it possible to increase the potential result of a trade in both directions. When the price moves in a favorable direction, profit is calculated from the entire position, not just the deposited margin. However, losses scale in exactly the same way. When the value of the collateral falls below the permissible level, the exchange issues a demand to top up the collateral (margin call), and if the unfavorable movement continues, it forcibly closes the position — liquidation occurs, and the trader loses the deposited margin.
- Margin — collateral that secures a leveraged position.
- Leverage — a multiplier of the position size relative to capital.
- Liquidation — forced closing when there is insufficient collateral.
Margin trading is a high-risk instrument and requires an understanding of market mechanics, discipline and capital management. Using high leverage significantly increases the likelihood of quickly losing funds during sharp rate fluctuations.
