What is Dynamic Leverage in Forex

Dynamic leverage is a risk management tool used by brokers to minimize their trade exposure and, at the same time, offer attractive trading conditions while protecting client accounts from the effects of over-leveraged trades.

Today’s article will focus on the concept behind Dynamic Leverage and look at real-world applications and how they can apply to your brokerage.

What is Leverage

Leverage in trading (or margin trading) isn’t a new concept; everyone will be familiar with the idea. A client deposits funds in their trading account, and the broker allows that client to open positions multiplied by the leverage on offer.

Typically, leverage is expressed as a ratio of 30:1, 50:1, 100:1, or even higher. This ratio shows how much a trader’s capital increases compared to their initial investment.

For example, a client deposits $1,000 with the broker offering 30:1 leverage on specific trades. The client would then be able to open positions worth $30,000.

In simple terms, leverage is a loan a broker provides to a trader, allowing them to control a more substantial position than they could with their capital alone. Traders get greater exposure to the market with potentially higher profits.

Many traders concentrate on the potential for greater profits and look for brokers offering the highest, ignoring the fact that while higher leverage can magnify profits, it can also magnify losses.

Get on the right side of a trade; higher leverage should bring more significant profits. On the flip side of the high-leverage coin, though, get on the wrong side of a trade, and the losses would be more significant.

Responsible risk management is essential for successful traders and even more so for successful brokerages. As a broker, you take on the trade exposure for your entire portfolio of clients. Your risk is magnified by the total volume of trades on your trading platforms.

Definitely not something to be taken lightly or left as an afterthought!

What is Dynamic Leverage

Dynamic Leverage is a strategy used to vary the leverage on offer based on the parameters of individual trading positions rather than trading accounts as a whole.

Client leverage is still based on the leverage ratio, but with Dynamic Leverage, the ratio changes automatically depending on the parameters of each trade, such as trade volume.

For example, a volume between 0 – 200,000 might have an amount of leverage of 1:50, whereas a volume between 200,000 – 400,000 might have a leverage of 1:10.

PLUGIT introduces the idea of “Tiers” in our approach to Dynamic Leverage. Our approach defines these tiers using a combination of Asset Type, Account Size, and Volume Type, amongst others.

This Tier technology allows for the exact definition of trading conditions across all trading strategies and clients.

Examples of Dynamic Leverage

Imagine a client with the following trading account characteristics:

• Account Currency = USD
• Equity = 25,000
• Leverage = 1:500

A trading account with 25,000 USD equity and 500:1 leverage could open orders with a total notional exposure of $12.5 million USD, which could pose a significant risk to a brokers book. To put it into perspective that would be 125 lots of USD/JPY with FX contracts of 100k in size.

Applying Tiers and Dynamic Leverage, we have a structure for this trading account that would look like this:

Let’s now look at some potential cumulative positions and how the margin will be applied according to the above table:

Position #1: BUY 10 lots of USD/JPY (1,000,000 USD notional)– This first position falls within the first tier of the Dynamic Leverage table, meaning that 500:1 leverage is applied. The margin taken for this position with 500:1 leverage is $2,000 USD.

Position #2: BUY 10 lots of USD/JPY (1,000,000 USD notional)– – This second position falls within the second tier of the Dynamic Leverage table, meaning that 200:1 leverage is applied. The margin taken for this position with 200:1 leverage is $5,000 USD.

Position #3: BUY 10 lots of USD/JPY (1,000,000 USD notional)– – This third position falls within the third tier of the Dynamic Leverage table, meaning that a 100:1 leverage is applied. The margin taken for this position with 100:1 leverage is $10,000 USD.

Position #4: BUY 4 lots of USD/JPY (400,000 USD notional) – This fourth position falls within the fourth tier of the Dynamic Leverage table, meaning that 50:1 leverage is applied. The margin taken for this position with 50:1 leverage is $8,000 USD.

Now, in the above example with dynamic leverage applied all 4 positions open cumulatively use 25,000 USD of margin and no more positions can be opened. This represents a total exposure of 34 lots of USD/JPY (3.4m USD notional). As you can see this is significantly less than the 125 lots of USD/JPY (12.5m USD notional) of exposure, which the same account would have been able to take without dynamic leverage.

Benefits of Dynamic Leverage

Adapting trade leverage based on actual trade parameters has significant advantages for your brokerage.

First and foremost, it is an effective risk management tool, mitigating your trade exposure and safeguarding your operations.

As we know it’s unusual for liquidity providers to extend high leverage terms like 500:1 to brokers so its not good practice to give this much leverage to retail clients with larger balances.

It is standard practice for many brokers to manually adjust account leverage settings based on account balance. Dynamic leverage removes the need to do this and streamlines the operation.

So, dynamic leverage allows a broker to extend high leverage (such as 500:1) to all clients irrespective of account size while protecting the trading book from large exposures generated from individual accounts.

Adapting trade leverage based on actual trade parameters has significant advantages for your brokerage.

So, dynamic leverage allows a broker to extend high leverage (such as 500:1) to all clients irrespective of account size while protecting the trading book from large exposures generated from individual accounts.

High leverage is one of the features traders look for, and if your trading environment limits leverage, you could be losing out on many potential clients.

With a Dynamic Leverage solution such as PLUGIT’s, your headline leverage remains attractive to all your traders. At the same time, our technology ensures that your trade exposure is minimized.

Dynamic Leverage promotes responsible trading practices, enhances risk management, and adapts to the ever-changing forex market environment.

Why not try a Demo?

PLUGIT’s solution has been a market leader since its introduction in 2015.

Our solution is based on tried and tested technology, and with the new features in our third-generation product, we’re confident of the benefits we can bring to your operations.

Contact us for a demo of the power of our Dynamic Margin module and see why PLUGIT is the Fintech provider of choice for over one hundred of the biggest forex brokers in the world today!