Margin and leverage

What is Margin?

At City Index margin, is worked out as a percentage. The margin required for a position is the amount of funds that you must have in your trading account in order to open and maintain a forex position.

For example, if the margin factor for a currency pair is 3.33% then you would need 3.33% of the total value of the trade on deposit in your account to open the position.

Supposing you physically buy £10,000 in GBP/USD at a price of 1.2250, the total value of the investment would be £10,000 or $12,250. This would be the equivalent of 1 CFD in GBP/USD at 1.2250.

From this example, you can see that with an FX CFD trade, you are only required to deposit $61.25 to open the equivalent to a $12,250 investment. This is how trading on margin leverages your position, freeing up additional funds to use on other products.

Financing: Each night you will pay a small financing charge on the exposure of the forex trade including the amount that has been effectively borrowed in order to trade the full position. In this sense, leverage works in a very similar way to how one might buy a house on a mortgage. 

Benefits and risks of trading forex on margin.

Forex trading is leveraged and traders utilise this leverage to increase their exposure magnifying their potential profits. With leverage, you can control a relatively large exposure for only a small initial deposit amount in your trading account, potentially maximising your return on investment and enabling the money to be used elsewhere  

It is important to remember however that leveraged forex trading also means that you are exposed to more risk if the trade goes against you and your losses will also be magnified, potentially losing more than the funds in your account.

Example of how leverage magnifies profits

Your trade in GBP / USD is successful and you decide to close out your trade with a $50 profit.  The return on your FX CFD trade is 81%, whereas the return on your physical currency trade is 0.4%.

Example of how leverage magnifies losses

Your GBP/USD trade is unsuccessful and you decide to close out your trade with a $50 loss.  The return on your FX CFD trade deposit is -81%, whereas the return on your physical currency trade is -0.4%.  

Margin requirements

Please note margin factors vary across currency pairs. Generally speaking, the higher the margin factor the riskier the pair. Please see the relevant Market Information sheet on the trading platform for full details.

In addition to the margin, you should always ensure you have sufficient funds in your account to cover any losses for the period that you decide to hold open you trade.

If you don’t, you could quickly find yourself on a margin call, which can happen when you don’t have enough funds in your account to keep open the position which puts you at risk of having it automatically closed out.

Margin Calls

You should always ensure you have sufficient funds in your account to cover any losses for the period that you decide to hold open you trade.  

If you don’t, you could quickly find yourself on a margin call, which can happen when you don’t have enough funds in your account to keep open the position which puts you at risk of having it automatically closed out.

The Margin Level Indicator on the City Index platform represents the level of cover you have associated with your open positions. It is located in the upper left corner of the trading platform. It displays one of the three scenarios listed below:

• Sufficient margin
  If your margin level indicator is greater than 200%, this will show as > 200%. This means that you have more than double the amount of funds needed to keep your positions open.
• Your trade is at risk
  If your margin level falls below 200%, the margin level will display a percentage between 80% and 200%, depending on the ratio. You are at risk of your trade falling further and automatically being closed out.
• Insufficient margin
  Should your margin level fall below 50%, you no longer have enough funds in your account to cover your total margin. Consequently (and depending on your margin close out level) automatic closure of your open positions may be triggered. A warning symbol will be displayed next to the margin level if it drops below 80%