Many of newbie or beginning traders usually don't fully understand the concept of leverage. Basically, if you or your partner have a start up trading capital of $1,000 and if you trade on a 1:50 margin you can effectively and legally control a capital up to of $50,000. However, here is the big draw back, a two percent move minus or against you and your trading capital is completely wiped out to zero. If you are a beginning in forex trader you should not use more than 1:20 margin well at least until you can get comfortable and profitable and after then and only then you can attempt to use higher margins.
Most Question is What does 1:20 margin mean? It means that with your $5,000 you will control a capital of $100,000. Let's say we are going to trading the currency pair EUR/USD and by using our entry and beginer strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against Euro. and will make proffit of the forex
Let's say current EUR/USD rate is for example 1.455. Again, if your trading capital is $5,000 and you are using 1:20 leverage basically you will effectively be exchanging $100,000 to Euros. which mean If the current rate is 1.455 you will receive 100,000/1.455 or about 68,728 Euros.
If the trade goes well in your direction margin will work very good in your favor and 1% decline in USD will mean 20% increase in your start up trading capital. So if EUR/USD rate moves from 1.455 to 1.469 we will be able to exchange your 68,728 Euros back to $101,000 for a profit of $1,000. and the profit is high. Since your start up trading capital was $5,000 it is effectively a 20% increase in your account. However, if the trade went against you and USD appreciated 1% vs. Euro your account would be reduced to $4,000. this will be good for forex strategy
Tuesday, June 9, 2009
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