What Does Leverage Mean In Forex – Whether you are a new trader in the forex market or you have solid experience, you must have come across the concept of profit. If you are just exploring Forex trading, you may be wondering what this term means. In this case, I suggest you read the article “What is the action”.
Since the leading brokers around the world offer different leverage ratios in Forex, here we will review the main points of trading with this financial instrument and try to answer the question: What is a good leverage ratio? But first, let’s define an important concept.
What Does Leverage Mean In Forex
Forex leverage is the amount of trading funds that the broker is willing to lend to your investment based on the ratio of your capital to the amount of credit funds.
What Is Leverage In Forex
The total amount given by the broker is not constant. Brokers set their own rates, which in some cases can reach 1:100 or more. Forex leverage is often expressed as a ratio. In this example, this means that with equity of $1, you can open positions up to $100.
Let’s find out what is the best level of leverage for a startup. Many newbies are attracted to leveraged income strategies because they want to make more money in a shorter period of time.
However, keep in mind that the benefits are associated with some risks. You need to understand at least concepts directly related to trading money management, such as:
For example, a trader who only has $1,000 in their account can actually trade the forex market with $50,000 with a leverage of 1:50 or $100,000 with a leverage of 1:100. In simple words, this trader risks losing 1,000 dollars of his funds, but if successful, earns a profit of 100,000 dollars if the position is opened at 100% margin and leverage 1:100.
What Is Liquidation Price?
For example, if your account balance is $1000 and you use a leverage of 1:100, you will actually have 100,000 USD to manage. This means that you have the opportunity to open more trades in different trading instruments and apply hedging strategies for additional protection against risks (hedging and its strategies are discussed in detail here). It allows you to diversify your portfolio, reduce risks, and increase your chances of profit.
Let’s look at this advantage using the previous example – you have 1,000 dollars in your account. Let’s say you don’t use leverage, meaning you trade 1:1.
Under these conditions, at best, you will be able to open a position with at least 0.01, and not on the EUR/USD pair.
This is why a lot in Forex is usually 100,000 currency units. In other words, to open a minimum position in one of the most traded pairs on the Forex market – EURUSD – you need 100, 000 * 0.01 * 1.17470 = 1, 174.70 USD.
What Is Leverage In Trading? How To Trade With Leverage
With 1,000 dollars in your account and no profit, you won’t have a chance to open such a small position. However, on a large scale, even people with a small deposit of 50-100 dollars have the opportunity to gain access to the art of trading and trading with professionals.
At first, when brokers did not pay any profit, the only opportunity to trade with leverage was to borrow a very limited amount from the bank, at high interest rates, with high guarantees and guarantees.
In the face of serious competition, forex brokers provide large payouts to attract customers with very low deposit costs and minimal commissions. If you trade intraday, leverage is almost free to use. If you decide to trade overnight, consider SWAP – this is the broker’s overnight commission.
The growth of deposits of high-risk traders can easily reach 300-500% profit, which is higher than any other bank.5. Convenience
Leverage Ratio: What It Is, What It Tells You, How To Calculate
It is important to understand that the main income of a decent broker comes from commissions for opening trades, SWAPs and spreads. Therefore, it is very important for a broker that every client uses his services as much as possible, succeed in trading and get rich. A decent broker does not require you to liquidate all your savings and swear never to trade in Forex.
Therefore, in a highly competitive environment, Forex brokers provide the opportunity to obtain favorable terms at low interest rates, a flexible tariff schedule, and minimum commissions. Most reputable brokers also offer personal manager services. A personal manager will help you understand all your nuances, choose the best action and balance your trading strategy.
You’ve probably heard of margin calls. Many traders are afraid of breathing these two words. But in fact, this function is designed to protect your deposits. Unfortunately, it often happens that new traders do not understand their risks. When it becomes clear to the broker that there is a high chance of losing your deposit, they will call or send you an automated message about the need to change your balance to cover the higher risks.
Careless traders sometimes forget this and the responsibilities that come with it. As a result of unethical trading, they can become creditors of the company. To avoid this, use the services of brokers that guarantee a zero balance in case of trade termination. Thanks to this feature, you will never lose more than what you have in your balance.
How To Change Leverage On Mt4 For Different Brokers?
This risk is a psychological trap that a trader falls into when using high leverage. There is a feeling that you have a lot of free money that you need to use and invest in something. It is very important for every startup to remember that leverage not only provides additional opportunities but also creates responsibilities. The most important thing is to cover losses at the cost of your own funds to avoid stopouts (you can find a detailed explanation with examples here).
Since you can open positions hundreds of times larger than your actual funds, you risk losing your balance too much. This situation is especially dangerous when several large positions are open at the same time. If you lose a trade, your account level is reduced for all other open positions and the risk of stop-out on these trades increases. In other words, if you abuse a free margin, most of your position can end in an instant like a house of cards and burn your deposit.
As mentioned above, it is very easy to take a big loss on your balance sheet with a lot of leverage. Newbies dishonestly believe that because the leverage is large, it is very easy to restore the account to its previous size. But you should always remember that to compensate the loss, the profit must be many times more. For example, if there is 100 USD in your balance, you have a loss of 50%, to get back to the breakeven position, you need to earn 100% from the balance of 50 USD.
The following is the table to calculate the percentage of profit that will return to the breakeven point in the event of a loss. I recommend printing it out and keeping it in front of the work screen as a reminder to follow the risk management rules.
Leverage In Forex Trading — How Does It Work?
In the case of high leverage, the loss in the balance also reduces your purchasing power, the funds available for customer shortages, and therefore the risk of stoppages. This is usually compensated by a reduction in position volume, which reduces the profit potential, meaning it will be more difficult to recover in the end.
It is always important to remember that using low, medium or maximum leverage in Forex is a commitment. You get back the principal amount of leverage in return regardless of whether you succeed or fail at the end of the trading day. The amount of leverage must be covered by the trader’s account and automatically deducted from their balance.
There is a commission for using the exchange which is automatically deducted from the merchant’s balance. Obviously, the price of the liver directly depends on the amount of its use. The broker usually receives a commission only for the actual amount of funds used.
What is the best level for beginners? If you are new to Forex, a good start is to use 1:10 leverage and 10,000 USD balance. Therefore, the best action for a beginner is definitely not more than a ratio of 1 to 10.
What Is Leverage In Forex Trading? How To Use It?
How can you find the best Forex income for yourself? Obviously, the answer to this question will be different for every trader.
The following table shows the leverage calculation and deposit conversion required for leverages with a classic lot of 100,000 USD.
Suppose we are ready to start trading with a deposit of 1000 USD, with an acceptable risk of up to 1% balance per trade and an acceptable position reduction of 1% with maximum variance of the portfolio.
Now we will calculate the position of our maximum size
How Extreme Leverage Can Kill Your Fx Trading Account
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