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
Showing posts with label leverage. Show all posts
Showing posts with label leverage. Show all posts
Tuesday, June 9, 2009
Thursday, September 11, 2008
Is Forex Leverage, A Good or Bad Thing?
The main reason that the forex market is found so attractive is because the forex market presents the traders with several different advantages which don’t really exist within all of the other markets. Even though leverage is something that you as a trader will have access to in several markets other than the foreign exchange market, within the forex market, leverage is a lot more exponential.
Most of the time, the leverage is going to depend on the forex broker that you are currently using but normally the leverage is around 400:1 or either 200:1. In the event that you aren’t familiar with this particular concept, 200:1 would mean that if you have one thousand dollars in your forex trading account, you will have the ability to trade up to two hundred thousand dollars.
In order to determine whether or not leverage is a bad or good thing, let’s take a look at the disadvantages and advantages of using leverage. The advantage of this particular type of leverage that is most important is that leverage can make you a lot of money within a matter of no time. The more money that is involved within a trade means that you are going to earn more when you make a perfect trade. In the event that you use near-high or high leverage, you will be able to make some really large profits.
The major advantage in doing this is that you are going to always have some losing trades, it doesn’t matter what strategy or system you are using. As a forex trader, you can even be correct on a trade and then it starts going against you and as a result you lose. The lose part is meant to relate to your entire forex trading account. Yes, it is true; it is possibly for you to lose all of your account within a matter of one trade.
As a forex trader, the main question that you need to ask yourself is how much risk are you as a forex trader willing to take-on. In a situation where you are actually willing to risk your entire account in a single trade, you aren’t going to have any problem in using all of the leverage that you possibly can. However, if you are a beginner in the forex market, or if you are currently trying to achieve some consistency instead of gambling, then as a forex trader you should wisely use leverage.
All-in-all, leverage is a forex tool that you are able to use in order to maximize all of your profits. When you use leverage very carefully, you will be able to avoid losing your entire account within a single trade; however leverage can also help you as a trader to maximize all of your profits. Overall, it truly depends on how much risk you as a forex trader are willing to take.
In forex trading, you have to set some boundaries for your trades.
Most of the time, the leverage is going to depend on the forex broker that you are currently using but normally the leverage is around 400:1 or either 200:1. In the event that you aren’t familiar with this particular concept, 200:1 would mean that if you have one thousand dollars in your forex trading account, you will have the ability to trade up to two hundred thousand dollars.
In order to determine whether or not leverage is a bad or good thing, let’s take a look at the disadvantages and advantages of using leverage. The advantage of this particular type of leverage that is most important is that leverage can make you a lot of money within a matter of no time. The more money that is involved within a trade means that you are going to earn more when you make a perfect trade. In the event that you use near-high or high leverage, you will be able to make some really large profits.
The major advantage in doing this is that you are going to always have some losing trades, it doesn’t matter what strategy or system you are using. As a forex trader, you can even be correct on a trade and then it starts going against you and as a result you lose. The lose part is meant to relate to your entire forex trading account. Yes, it is true; it is possibly for you to lose all of your account within a matter of one trade.
As a forex trader, the main question that you need to ask yourself is how much risk are you as a forex trader willing to take-on. In a situation where you are actually willing to risk your entire account in a single trade, you aren’t going to have any problem in using all of the leverage that you possibly can. However, if you are a beginner in the forex market, or if you are currently trying to achieve some consistency instead of gambling, then as a forex trader you should wisely use leverage.
All-in-all, leverage is a forex tool that you are able to use in order to maximize all of your profits. When you use leverage very carefully, you will be able to avoid losing your entire account within a single trade; however leverage can also help you as a trader to maximize all of your profits. Overall, it truly depends on how much risk you as a forex trader are willing to take.
In forex trading, you have to set some boundaries for your trades.
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