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Let’s assume the $100,000 position with 1:1 leverage (which means you invested the entire cost of the position yourself and had no borrowings) has now risen in value to $102,000. This means you have made a $2000 profit and your rate of return would be a mere 2% ($2000 profit divided by $100,000 money you invested as deposit)

But supposing you had a leverage of 100:1 and the $100,000 had risen to $102,000? In that case you would have invested only $1000 of your own money and the remaining $99,000 would have come as a loan from your broker. But importantly your rate of return has increased manifold, and in this instance would be 200% (divide $2000 profit by $ 1000 initial deposit and multiply that figure by 100).

As you can see from the above examples, a 1:1 leverage got you a mere 2% rate of return while a 100:1 leverage got you a 200% return.

Leverage is often referred to as a double edged sword. What does this mean? In the examples we talked of earlier the investment had made a profit of $2000(i.e. $100,000 had risen to $ 102,000).What if it is the other way around?

For example say on a 1:1 leverage what if the value of the position had declined from $100,000 to $98,000. This means you lost $2000 which means a negative rate of return (-2%). If the same deal was made on a leverage of 100:1 it means even more negative rate of return (-200%). What this means is that, just as increased leverage contributes to greater profits when the trade goes your way, similarly if the trade were to go against you increased leverage will certainly result in greater losses. This is what is meant by leverage being a double edged sword.

Margin Call is a call from broker to trader (either phone call, email or alert in the trading platform) asking him/her to deposit more money in the trading account failing which some or all of his trades will be liquidated by the broker at the current market price.

Generally a broker will liquidate any position that is losing more than 50% of the margin (this is called Minimum Margin) it uses. The reason why it happens is to preclude the possibility of your loosing more money than you had originally invested.

How a margin call occurs is best explained by this theoretical example.

Let’s assume you are trading in a Mini account with 1% margin and have deposited $10,000. You then buy 1 mini lot of EUR/USD. Your account info snapshot will look as follows.

Supposing you had closed this position by selling it at the same price as it was purchased, then your account information snapshot would have reverted back to:

But you didn’t close the position. On the contrary you decided to keep going.

Assume you decide to buy a further 60 lots of EUR/USD making it a total of 61 lots

Your account info snapshot will now look as follows.

From the above consolidated position you stand to make great profits if EUR/USD rises as you had expected. But it will be a terrible scenario if EUR/USD falls

Assume the EUR/USD starts to fall, in which case your Equity will fall too. Your Used Margin will remain at $6100. But once your equity equals the used margin or drops below $6100, you will have a Margin Call. This means that some or all of your 61 lot position will immediately be closed at the current market price, unless you take steps to increase your equity to bring it sufficiently above the used margin. This basically explains how a margin call could be triggered.