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Dynamic Leverage

Dynamic Leverage

This section explains how Dynamic Leverage works as well as how “Margin Used” is calculated in cTrader. The margin used by open positions is related to the leverage given for each position opening. Dynamic leverage can be set to work in two very different ways. One method recalculates margin requirements upon each event, the other calculates margin requirements upon opening the position and is constant throughout the lifetime of the position, this concept is explained in this section, everything on this page is important and it is urged all traders understand this.

Leverage Types

Account Leverage

There are two types of leverage in cTrader. These are the account’s leverage and the volume based dynamic leverage. The account’s leverage is the maximum leverage allowed for each trading account. It is set during the account’s creation and can only be modified by your broker.

Volume Based Dynamic Leverage

Brokers have the ability to dynamically reduce leverage after a volume of open positions is surpassed for each symbol and direction. The Dynamic Leverage tiers can be found for each symbol from the MarketWatch section, in the Symbol Window or Info Panel. An example of tiered leverage is the following;

Applicable Leverage

Despite your account having leverage of 1:500 (for example), this doesn’t mean all positions for all symbols will use this value for calculating margin requirements, this value is simply the limit on how much leverage your account will use in the event that your broker allows more for a certain symbol. If your broker uses Dynamic Leverage the applicable leverage for each volume tier is calculated dynamically for each symbol based on the following equation;

Applicable Leverage Tier X = Min(Account Leverage, Volume Based Leverage Tier X)

Tier Volume in USD Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50

According to the above Dynamic Leverage table the equation can be better understood like this;

Tier 2 = min(500, 200). This means that for this tier the leverage that will be used is 1:200.

If your account leverage is 1:100 the equation can be understood like this;

Tier 1 = min(100, 500) Tier 2 = min(100, 200) Tier 3 = min(100, 100)

This means at tier 1 your margin is still calculated using 1:100, the same for tier 2 and tier 3.

Calculating Tiers

The leverage tiers are always represented in USD volume, regardless of the symbol.

For example;

Opening a position of 1,000,000 Buy EURUSD @ 1.12542
Total Buy Volume is 1,000,000 EUR (1 000 000*1.12542 = 1,125,420 USD)
Because the USD exposure of this position is 1,125,420 USD it will fall within two tiers (tier one and tier 2)
Margin Used for Position will be calculated like this:
1 000 000/500 = USD 2,000
125 420/200 = USD 627.10

Total Margin Used = USD 2627.10

Each symbol could have different Dynamic Leverage settings. The Dynamic Leverage tiers used to calculate Margin Used for a position is influenced by the exposure of a specific symbol and specific direction, the exposure is not netted off.

Calculating Margin

Margin is always converted into the accounts deposit currency. The calculation follows this process; Base Asset > USD (using spot rate depending on trade direction) > Deposit Currency (using spot rate depending on symbol structure)

Here is an example following the above process;

Account Balance = GBP | Zero positions (therefore zero exposure) | Leverage @ 1:500
BUY 100k EURUSD.
Margin Required = EUR 200
200 EUR into USD @ 1.09100 (ASK) = USD 218.20
Ask price us used because order direction is Buy
USD 218.20 into GBP @ 1.29400 (ASK) = GBP 168.62
Ask price is used because conversion of USD into GBP uses GBPUSD pair to behave like Selling USD to Buy GBP, therefore Ask price is used.

Calculating Exposure

Exposure is calculated per symbol and separately for each direction. The exposure in each direction is used to calculate the margin required.

Here is an example of calculating exposure while opening positions in different directions;

Account Balance = USD| Zero positions (therefore zero exposure) | Leverage @ 1:500

Step 1

Open Position Buy 100k USDJPY.

Total Buy Volume/Exposure : 100k USDJPY
Total Sell Volume/Exposure : 0 USDJPY

Step 2

Open Position Sell 100k USDJPY.

Total Buy Volume/Exposure : 100k USDJPY
Total Sell Volume/Exposure : 100k USDJPY

Step 3

Open Position Buy 200k USDJPY.

Total Buy Volume/Exposure : 300k USDJPY
Total Sell Volume/Exposure : 100k USDJPY

Practical Examples

This section includes a number of practical examples of margin calculation in conjunction with Dynamic Leverage and certain trading actions. For the below examples the following settings have been used;

Account Leverage: 500
Account Currency: USD
Volume Based Dynamic Leverage Tiers:

Tier Volume Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50
Example #1

Opening Positions

In the following example, we illustrate how the margin is calculated when a trader opens subsequently three positions on the same symbol, with the following variables in addition to the ones already defined above.

Position 1

Volume: 1 mil. Buy USDJPY
Total Buy Volume: 1 million USD
Margin Used for Position: 1 000 000/500 = 2000

Total Margin Used: 2000

Position 2

Volume: 1 mil. Buy USDJPY
Total Buy Volume: 2 million USD
Margin Used for Position: 1 000 000/200 = 5000

Total Margin Used: 7000

Position 3

Volume: 1 mil. Buy USDJPY
Total Buy Volume: 3 million USD
Margin Used for Position: 1 000 000/100 = 10000

Position Margin Recalculation

When Dynamic Leverage is used by a broker, this causes different amounts of margin being taken for different positions according to which tier they fall in at the time they were opened. As exposure is reduced by closing, reducing or reversing positions, the tiers that the remaining exposure / positions fall within could be different, this may cause margin requirements to be lower than what is being blocked by the remaining positions.

Brokers have the option to choose whether margin requirements should be recalculated when exposure is reduced, or not.

To ensure the correct amount of margin is being used according to the exact amount of exposure against the Dynamic Leverage tiers assigned to the symbol, or if margin requirements should be locked to position once it is created. Both of these cases are explained further in this guide.

If recalculation is triggered, the position with the lowest volume will be recalculated first and the rest of the positions will be recalculated sequentially according to their size; smallest to largest.

If recalculating margin for positions is enabled by the broker recalculation can triggered by these events;

  1. Some trading action occurs therefore the margin required to hold the rest of the positions is recalculated. Actions that trigger recalculation are; Closing Positions, Decreasing Positions, Reversing Positions, Stop Out, Rejected or Partially Filled Order.
  2. Broker changes settings of Dynamic Leverage or Account’s leverage.
Example #2

Trading when Margin is Recalculated

In this example we show how margin is recalculated for positions when a broker chooses to recalculate margin requirements. Margin is recalculated when trading events occur, for the specific symbol and direction in subject. The following properties are used for the example;

Account Leverage: 500
Account Currency: USD
Volume Based Dynamic Leverage Tiers:

Tier Volume Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50

The account has three positions as illustrated below;

Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Position 2: 1,000,000 BUY USDJPY - Margin Used for Position: 5000
Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Total Margin Used: USD 17000

Step 1

Partially close Position 2 by 500,000 (half) - Margin Used for Position 2: 5,000/2 = USD 2,500

This action triggers recalculation for all positions according to current exposure.
Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2,000

  • 1,000,000/500 (tier 1) = 2,000

Position 2: 500,000 BUY USDJPY - Margin Used for Position: 2,500

  • 500,000/200 (tier 2) = 2,500

Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 7,500

  • 500,000/200 (tier 2) = 2,500
  • 500,000/100 (tier 3) = 5,000

This example highlights how margin has been recalculated according to the reduction of Position 2.

Example #3

Broker Changes Dynamic Leverage & Margin is Recalculated

When a broker changes Dynamic Leverage tiers and chooses to recalculate margin requirements for all positions, the Used Margin for your positions will change. This example shows what happens in this circumstance. The following properties are used for the example;

Account Leverage: 500
Account Currency: USD
Volume Based Dynamic Leverage Tiers:

Tier Volume Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50

The account has three positions as illustrated below;

Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Position 2: 1,000,000 BUY USDJPY - Margin Used for Position: 5000
Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Total Margin Used: USD 17000

Let’s suppose that the broker decides to change the dynamic leverage for USDJPY as illustrated in the table below;

Tier Volume Leverage
1 0-1mill 200
2 1-2mill 100
3 >2mill 50

Then margin used will be recalculated immediately as follows;

Position 1: 1,000,000 BUY USDJPY

  • Tier #1 (1,000,000/200) = 5,000 Margin Used

Position 2: 1,000,000 BUY USDJPY

  • Tier #2 (1,000,000/100) = 10,000 Margin Used

Position 3: 1,000,000 BUY USDJPY

  • Tier #3 (1,000,000/50) = 20,000 Margin Used

Total Margin Used = 35000

Note: It is very important to take notices about margin requirement changes from your broker very seriously because if your margin level drops below stop out level, some of your positions might be stopped out or partially stopped out to restore necessary margin.

Example #4

Trading when Margin is NOT Recalculated

When margin recalculation is not used then margin is never recalculated even when you close positions. In this case each position blocks margin and holds it until the position is closed entirely, when partially closed margin will be released proportionately according to the total amount that is held by the position. This example illustrates this through a number of steps.

The following example explains this concept;

Account Leverage: 500
Account Currency: USD
Volume Based Dynamic Leverage Tiers:

Tier Volume Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50

Step 1

Open Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Open Position 2: 1,000,000 BUY USDJPY - Margin Used for Position: 5000
Open Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Total Margin Used: USD 17000

Step 2

Close Position 2. The following positions remain;

Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Exposure of Long USDJPY = 2,000,000 (volume of Position 1 + volume of Position 3)

Your margin used will be calculated as follows;

Margin Used = Margin used for Position 1 + Margin used for Position 3 = 12000

Step 3

Open Position 4: 1,000,000 BUY USDJPY

  • Tier #3 (1,000,000/100) = 10,000 Margin Used

Your margin used will be calculated as follows;

Margin Used = Margin used for Position 1 + Margin used for Position 3 + Margin Used for Position 4 = 22000

Step 4

Partially close Position 4 by 500,000 (half) - Margin Used for Position 4: 10,000/2 = USD 5,000
Partially close Position 1 by 500,000 (half) - Margin Used for Position 1: 2,000/2 = USD 1,000

Summary of Open Positions;

Position 1: 500,000 BUY USDJPY - Margin Used for Position: 1000 Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000 Position 4: 500,000 BUY USDJPY - Margin Used for Position: 5000

Your margin used will be calculated as follows;

Margin Used = Margin used for Position 1 + Margin used for Position 3 + Margin Used for Position 4 = 16000

Note: In this case, your old positions might be using more margin than required but you are not in danger of stop outs from changing margin calculation requirements.

Note: Contact your broker to clarify which of the two methods is used

Example #5

Broker Changes Dynamic Leverage & Margin is NOT Recalculated

When a broker changes Dynamic Leverage tiers and chooses to not to recalculate margin requirements for all positions, the Used Margin for your positions will not change. This example shows what happens in this circumstance. The following properties are used for the example;

Account Leverage: 500
Account Currency: USD
Volume Based Dynamic Leverage Tiers:

Tier Volume Leverage
1 0-1mill 500
2 1-2mill 200
3 2-3mill 100
4 >3mill 50

Step 1

The account has three positions as illustrated below;

Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Position 2: 1,000,000 BUY USDJPY - Margin Used for Position: 5000
Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Total Margin Used: USD 17000

Step 2

Let’s suppose that the broker decides to change the dynamic leverage for USDJPY as illustrated in the table below;

Tier Volume Leverage
1 0-1mill 200
2 1-2mill 100
3 >2mill 50

Since the broker has chosen not to recalculate margin, no changes will occur in the Total Margin Used.

Step 3

Close Position 2

In this case the account will have the following positions and Total Margin Used

Position 1: 1,000,000 BUY USDJPY - Margin Used for Position: 2000
Position 3: 1,000,000 BUY USDJPY - Margin Used for Position: 10000

Total Margin Used: USD 12000

Step 4

Open Position 4: 1,000,000 BUY USDJPY

  • Tier #3 (1,000,000/50) = 20,000 Margin Used

Margin Used = Margin used for Position 1 + Margin used for Position 3 + Margin Used for Position 4 = 32000