In the recent years, online trading has seen exponential growth on all financial instruments. As more investors join the Futures and Forex trading community we urge them to understand the risks involved in investing in such financial instruments. Before investing in the Futures and Forex markets investors should understand how markets work, governing rules and mechanisms, and most importantly that trading on Futures and Forex is not suitable for everyone, and investors should only use capital they can afford to lose. In the United States of America these markets are regulated and supervised by the Commodity Futures Trading Commission (CFTC) and by the National Futures Association (NFA). NFA publishes several investor guides aiming to provide awareness to those individuals interested in investing in the Futures and Forex markets.

Leverage in Futures and Forex trading
The advantage of trading Futures lays behind the utilization of so called margin. Each product traded requires a minimum margin deposit necessary to buy or sell a particular commodity or currency pair. For futures products the margin requirements to carry a position overnight, also referred to as "performance bond," are set by the exchanges on which the contracts are traded. Intraday margins are instead set by the Broker and/or FCM and can vary from firm to firm. For forex products margins are set by the FDM or dealer.
The concept of margin derives from the effect of leverage (or gearing). The amount of initial margin is small relative to the value of the product traded, so that transactions are leveraged. A relatively small market movement will have a proportionately larger impact on the funds deposited in your trading account, this may work against you as well as for you. You may sustain a total loss of your funds in your account and of any additional funds deposited to maintain your open position/s off any margin calls. On your futures account if the market moves against your position, or margin requirements are increased, you may be called upon to deposit substantial, additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit. However, on a forex account positions may be liquidated by the dealer at any time without warning as soon as you fall below the margin amount originally needed to open the position/s.

Leverage and risk management
While our day-trading margins are among the lowest in the industry, we strongly suggest you not to use your leverage to the maximum by committing all of your capital, as leverage may work for you as well as against you. Using margins in a conservative manner is an essential part of your risk management and trading attitude, and it should be an important step toward your growing trading experience. You should always have residual leverage to utilize as a buffer to help you getting through normal markets swings.

E-mini S&P 500 (ES) day-trading Margins: $500, Account balance: $2,000 , ES futures contract value: 1,250 points (or $62,500 per contract)
In the above scenario you can open 1 ES position every $500 and up to 4 open positions. Let's assume you open the maximum position allowed by the day-trading margin($2000/$500= 4 contracts). In this case you are using the maximum leverage allowed. Your margin ratio would be of 125:1 and you would be controlling $250,000 with 0.8% or $2,000 of this value. That means that every dollar used in your margin account will control $125 dollars on each open position. Consequently, every point movement will generate a Profit or Loss (P&L) of $200 in your margin account. Finally, this means that a 0.2% movement on the ES contract (2.50 points) can result in profit or a loss on your trading account of $500 that is 25% of your original account value.

E-mini S&P 500 (ES) day-trading Margins: $500 , Account balance: $ 2,000 ES futures contract value: 1,250 points (or $62,500 per contract)
In this scenario you can still open 1 ES position every $500 and up to 4 open positions. This time instead let's assume you open 1 position only. While $500 are used from your trading account to margin your position, you still have $1,500 that can still be used for the purpose of margining this position. As you can see this example shows a more conservative approach to your trading. Your margin ratio will be around 31:1. Every dollar used in your margin account, will control $31.25 dollars of the future contract value. Every point movement in the future contract will generate a profit or loss (P&L) of $50 in your margin account. This finally means that a 0.2% movement in the contract (2.50 points) can result in a profit or loss on your trading account of $125, that is less than 7% of your original account value.

USD/JPY Leverage: 100:1 (or 1%), Account balance: $4,000 USD/JPY Forex contract value: $100,000 (100,000 BCU)
Here is a quick example of what a 100:1 leverage could do on a standard Forex account utilizing a leverage of 100:1. Assume you buy 2 lots of currency pair USD/JPY, that is $200,000 worth of JPY (1 lot = 100,000 BCU). In order to complete the transaction, based on a margin of 100:1 or 1%, you need to commit a margin of $2,000. If market moves against you 100 pips that is about $1,700 in loss. A greater leverage will give a greater purchase power however it will also expose you to a higher risk-over-invested-capital ratio.

Examples provided are intended for educational purposes only and are not meant to be exhaustive on the argument, neither substitute the risk disclosures and additional risk disclosures you need to read, understand and sign, before opening a trading account with us. Concepts expressed on this page do not aim to decry Futures and Forex trading regardless of the leverage used, rather to create awareness especially among less experienced traders, as there is a great risk of loss in these financial instruments and only risk capital should be employed.