Forex Forum Is The Best Way To Learn More About Forex Trading Leverage.
Leverage brings the excitement factor into forex trading. Traders are able to gain greater exposure to the market than what they could otherwise afford by themselves. However, while leverage increases the potential for gains, losses are amplified too. This is why leverage is often compared to a double-edged sword.
So, choosing an effective leverage ratio is important for long term trading success. When traders undertake leveraged trading, they are required to open a margin account. Traders need to fund this account with an initial margin, a percentage of the full value of the position they intend to open. This amount is used by the broker to place trades in the inter-bank market and to manage all leveraged positions in the trader's account. If losses erode the margin levels below a prescribed limit, the broker issues a margin call so that the trader can deposit the required amount for leveraged positions to be maintained.
What is leverage is forex trading?
Forex Leverage is a way for a trader to trade much bigger volumes than he would, using only his own limited amount of trading capital.
How does leverage work in Forex trading?
Let's assume you invest $50 in EUR/USD, and your leverage is one. If the price goes up 10%, your profit will be $5 ($50 x 10%). However, if you set the leverage to 20 instead of 1, your investment amount will rise to $1,000 ($50x20).
As you can see, your profit has been multiplied by 20. That's how leverage works. It's a little like the speed of a car: the greater it is, the faster you reach your destination. However, high speed brings more risk. That's why every car driver chooses the speed that works for them, depending on their experience, road surface conditions and the traffic code. For novice traders, we recommend using the minimum leverage of 1 to avoid major risk in case the market moves against you.
Leverage Example
Let's say you have $1,000 in your forex account. You believe that the Canadian dollar will soon rise in value, so you invest your entire account balance into Canadian dollars. When you buy, $1 is equal to CA$1.327, which means that you add about CA$1,327 into your account.
At the end of the day, the value of the U.S. dollar falls in comparison to the Canadian dollars — $1 is now worth only CA$1.320. You exchange your money back and receive about $1,005. This means that your total profit is about $5 — and that's before you pay broker fees.
Benefits of leverage use:
1. Chance of making super high profits
2. Improving capital efficiency
3. Low entry level
4. Favorable financial conditions
5. Convenience
6. Security
More Leverage Means More Opportunity - and More Risk
It's crucial to remember: increasing leverage increases risk. To limit downside risk, monitor your account regularly and use stop-loss orders on every open position. Placing contingent orders (such as stop-loss orders), will not necessarily limit your losses.
Leverage can be described as a two-edged sword, providing both positive and negative outcomes for forex traders. This is why it is essential to determine the appropriate effective leverage and incorporate sound risk management.
Top traders make use of stops to limit their downside risk when trading forex. At forum.forex we recommend risking no more than 1% of the account equity on any single trade and no more than 5% of the account equity for all open trades at any point in time.
Furthermore, successful traders make use of a positive risk-to-reward ratio in an attempt to achieve higher probability trades over time.
How to Calculate Leverage in Forex
To measure the leverage for trading - just use the below-mentioned leverage formula.
Leverage = 1/Margin = 100/Margin Percentage
Example: If the margin is 0.02, then the margin percentage is 2%, and the leverage = 1/0.02 = 100/2 = 50.
To calculate the amount of margin used, just use our Margin Calculator.
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