When it comes to Forex trading, you need to consider the two vital concepts of Leverage and Margin. Misuse of these concepts can easily cause concern. The presence of leverage in Forex is one of the reasons why many people are attracted to Forex trading compared to other financial markets, because it can increase people’s profits many times over. Many traders have heard the word leverage, but few know its definition, how leverage works, and how it directly affects their profits and losses. There is no mandatory leverage, but by getting to know the concept and the useful methods available, you can make the use of leverage in Forex an advantage. In the following, we will teach the Leverage force lever, which is an article taken from Trading Pedia.
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What is Leverage?
When we refer to leverage in Forex, we usually mean using borrowed capital to increase the return on investment we intend to make. This helps both the investor and the investment company to operate and trade. If we want to define the lever in Forex simply, we must say that with the lever you have the ability to control a large amount of money using none or a very small amount of your money and borrow the rest. What is worth noting is that leverage is always associated with a higher level of risk. If an investor decides to trust the leverage to invest in Forex and that investment moves against the investor, it seems that the losses he will suffer are much greater than when he did not use the leverage in the investment. . So it is useful to say that leverage in Forex increases both profits and losses.
Leverage is usually provided using a ratio, for example 1: 100 or 1: 500. This relationship indicates that for every $ 1 the investor deposits into his account, he can trade $ 100 or $ 500. The best leverage for Forex trading is 1: 100. With the help of leverage, investors do not necessarily need to have a thousand dollars in their assets to trade in the market, where only large companies or institutions were able to participate several years ago.
Forex has a very high level of leverage, because the market trades with the largest volume of daily trades from a variety of financial markets. Brokers allow their clients to use a high level of leverage, as it is relatively easy to enter and exit transactions (liquidity). Due to the fact that there is a lot of liquidity, traders can manage their failure situations in a much simpler way.
Leverage example in Forex
Currency trading is usually done in Forex for a standard amount of units called lots. Each lot is worth 100,000 units of a particular currency. If a trader uses the US dollar as his currency, if he enters a position with a standard lot, he buys or sells 100,000 units of that currency.
In Forex, if a trader has $ 1,000, while controlling a total of 100,000 standard lots, his leverage is 1: 100. A trader can trade a maximum of $ 100,000, while having only $ 1,000.
Now, let’s imagine that the trader had a total of $ 100,000 and his account value increased by $ 1,000. The merchant has now expanded his banking rotation by 1.%. This is what is known as a 1: 1 lever. This does not happen in Forex, because it creates leverage, so traders do not need to have a lot of money to trade in the market. The trader uses the 1: 100 leverage and the $ 1,000 profit he earns to actually double his deposit. Sounds like a good deal? Yes?
However, there is another scenario. Let’s imagine that instead of increasing the traders’ account by $ 1,000, it decreases by $ 1,000. Using a higher level of leverage increases purchasing power, but is also risky. This is why the Forex market is often referred to as the Leverage lever as a double-edged sword.
Here is another example of using a very high lever:
When you are looking for a broker, you come across brokers who offer very high leverage. Some brokers even offer a leverage of 1: 1000. With such a lever you can open an account with $ 300 and control transactions up to $ 300,000.
The average value of a pip in a $ 300,000 trade is $ 30. If you lose 25 pips in a trade, your total account will be zero. You should know that each pip at the level of one lot, which is equal to 10,000 base units, is equal to $ 1 profit. Sounds very dangerous, doesn’t it?
Be careful when using leverage in Forex!
If you use the lever in Forex, you trade several times your money, and as a result, you increase your risk equally, and you lose as much as you lose. That’s why you have to be completely forex trained to use it.
It is true that using leverage in trading requires less capital and has advantages, but it is equally risky and it is important to monitor open positions and other things to avoid large losses.
Using leverage tempts people to increase their trading volume much. This greed for leverage can cause people to not look at the deal properly and disrupt their trading strategy. This greatly increases the risk in the transaction. Our advice is to move on to your trading strategies and let the leverage in the Forex market have an irreversible effect on you.
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