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The allure of leverage attracts many investors to margin trading as it allows traders to trade large positions with a smaller amount of capital. In essence, it gives traders more bang for their buck when it comes to capitalising on market movements. Yet, it might not be suitable for everyone. Throughout this article we will explain the concept of margin trading and show you how you can start margin trading in Australia today.
What is Margin Trading?
Margin serves as a crucial tool in trading, acting as the required collateral that allows traders to open positions larger than their actual trading account balance. By borrowing from a broker, traders can leverage their investments across different asset classes, aiming for greater returns while managing the inherent risks of magnified losses.
Benefit of Margin Trading
The benefit of trading on margin is that traders can gain full exposure to a particular market at a fraction of the cost. This can prove extremely beneficial to traders as it magnifies the potential profits garnered from a successful trade.
Risks involved in Margin Trading
However, trading on margin can also result in the magnification of potential losses should the trade go in the opposite direction that the trader desires.
Therefore, it is essential before beginning to utilise leverage and trade on margin that a trader has a good understanding of market dynamics, a trading strategy that incorporates various risk mitigation tools, and the mental wherewithal to cut losing trades early and let winners fully play out.
Initial and Maintenance Margin
There are two components of margin to consider when placing a trade; initial margin and maintenance margin.
Initial Margin
The initial margin is the amount a trader has to put forward as collateral to initiate either a long or short position. It can also be referred to as the deposit margin or just simply as a deposit.
Maintenance Margin
Maintenance margin, on the other hand, is the amount of capital that a trader must have to fund the current value of the open position and cover any running losses. The initial margin will usually come in percentage form.
Start Margin Trading in Australia
When trading on margin, the broker that is being used as a counterparty on the trade allows the trader to deposit a percentage of the full notional position upfront.
The amount of margin required is determined by the trading provider’s margin system and on the particular asset class being traded. The margin required also informs traders of the overall amount of leverage being used during the trade.
Leverage is an amplifier of capital, allowing traders to trade position sizes larger than the amount of capital within their individual trading account. It is often expressed as a ratio, such as 30:1.
Now that we understand the concepts of margin and leverage, let’s run through an example, when starting margin trading in Australia, using Vantage as the trading provider.
You can start CFD trading in Australia and utilise the expertise of an experienced team in everything from Gold Trading to CFD Indices, Crypto CFD trading and Forex trading in Australia.
CFDs allow you you speculate on the price movements of an instrument without actually owning it.
How Does Margin Trading Work
The margin for trading specific assets with Vantage are listed below. Remember to use the tools listed above to determine your initial margin and maintenance margin requirements.
| Category | Instrument | Leverage Ratio | Margin % |
| Forex | GBPUSD | 30:1 | 3.33% |
| Forex | EURUSD | 30:1 | 3.33% |
| Forex | AUDUSD | 30:1 | 3.33% |
| Precious Metals | Gold CFD (XAUUSD) | 20:1 | 5% |
| Indices | DJ30 | 20:1 | 5% |
| Indices | NASDAQ | 20:1 | 5% |
| Commodities | CL-OIL | 10:1 | 10% |
| Share CFDs | Tesla Share CFD | 5:1 | 20% |
| Cryptocurrencies | BTCUSD | 2:1 | 50% |
With Vantage, you can trade any of the major Foreign Exchange pairs with 30:1 leverage. This equals a margin percentage of 3.33%.
Using this leverage ratio for our example, let’s say that you want to open a long AUD/USD position with a notional value of $1,000. The initial amount needed to fund this position would be $1,000 x 3.33% = $33.3. This simple example highlights the power of leverage, with a deposit of $33.3 allowing the trader to gain exposure to $1,000 worth of AUD.
However, you must keep in mind that once you have opened your position you may be required to add more capital if the trade begins to go against you and the initial margin is no longer enough to keep the position open. In this situation, your trading provider will be forced to place you on a margin call and you will have to deposit additional funds to keep the position open.
Key Points to Takeaway before Trading on Margin
In this article, we have covered the basics behind margin trading, the risks and benefits of trading with leverage, and how to utilise limited amounts of capital to make outsized gains. However, there are several key points to keep in mind when trading with leverage. These are the following:
- Trading on margin means you are only required to put down a deposit or collateral to open a position.
- The amount of margin required is dependent on the amount of capital in your account, the asset being traded and the form of derivative contract being used.
- Margin increases your exposure which can magnify not only your profits but losses as well.
- If you don’t retain sufficient capital in your account to cover your maintenance margin requirements your position will be closed out and your losses locked in.
Margin Trading with Vantage
Vantage gives traders the ability to trade on margin. With competitive spreads, traders can go long or short on Forex pairs and derivatives of Cryptocurrencies, Indices, Commodities and Shares five days a week, to take advantage of any opportunities you may be presented with.
It is simple to start CFD share trading with the right resources to help you.
You can open your live trading account in less than five minutes with Vantage to start margin trading. Vantage also provides a free demo account. This will allow you to practice various trading strategies and techniques without having to deploy your own capital.
