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Floating Leverage in Forex

May 29, 2013 by

Lately, some brokers began introducing floating leverage (Alpari on real accounts some time ago, Mayzus recently on demo accounts). What does it mean? Is it bad or good for trading? Those questions trouble many Forex traders.

Floating leverage is a kind of leverage that changes (usually, decreases) as the volume of the open positions grows. Consider that you are trading normally with 1:500 leverage. Once the total volume of all your currently open positions exceeds $3 million, it goes down to 1:400, but only for the volume above $3 million, so that you do not have to worry about increased margin requirement for the rest of your positions. When the volume exceeds $5 million, the leverage goes down to 1:200 on everything above the threshold volume. After $7.5 million, it declines to 1:100, and so on. That is just an example, but the general dependence is always the same: you will require more margin to hold positions at higher volumes.

So, why do brokers do it? FX companies reduce their own risk by providing less leverage on high-volume positions. After all, leveraged positions consist mostly of the broker’s capital. Floating leverage helps to alleviate part of that risk.

So, can it be dangerous? Yes, in some cases it can be. While floating leverage will not change your margin requirement for the volume, which is below the threshold value, the sudden change in currency rates may push your open volume above the threshold, increasing the margin requirement for a part of it.

You can look at the following example: your broker uses the following simple leverage scheme: 1:500 for volume below $1 million and 1:250 for volume exceeding $1 million. You have a GBP/USD position open for 6.5 standard lots (650,000 GBP). At the GBP/USD rate of 1.5000 the total USD value of this position is $975,000, and the required margin to hold that position would be $1,950. If the GBP/USD rate rises to 1.6000, with fixed leverage the margin requirement would rise by as little as $130 to $2,080. But the total USD value of this position rises with GBP/USD — from $975,000 to 0 $1,040,000, which is above the $1 million threshold. So, the floating leverage results in the required margin increase to $2,000 (for volume below $1 million) + $160 (for volume above $1 million). As you can see, the actual value is $80 higher than if it would have been with the fixed leverage. Now, you could say that $80 is not too much compared to $2,080 margin (~4% difference), but you should be aware of this potential jump in your margin requirement when you plan your trading strategy. I hope this caveat helps.

If you have further questions on floating leverage or if you would like to share your commentary on this topic, please feel free to do so using the form below.

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