Leverage in Forex
Leverage in Forex: There are more and more novice traders who decide to trade in the FX market. Therefore online currency trading is accessible to a multitude of novice traders while each person will have their own reasons to bargain on forex, the leverage remains available in this market one of the most popular reasons among traders Beginners choosing the FX market.
If you are a beginner trader, you may ask:
What is the leverage effect?
How to use the leverage effect?
Is it better to trade without leverage?
The purpose of this article on leverage is to provide a rational explanation of the leverage effect on the currency market except for the safety recommendations.
What exactly is the leverage effect?
You’ve probably already seen pages on the web explaining something like 0.01 lots, ECN and 1:500 for leverage. Further While each of these terms may not always be clear to a forex beginner, strong demand for an explanation of leveraging effect on Forex is required in terms of search on the web.
Forex Leverage Explanation:
The financial leverage is a bit the dabu of finance. It is a tool that allows the increase of the ability to speculate or invest without resorting to larger funds. With the help of leverage, a trader can open orders up to 1.000 times the value of capital. In short, leverage is a way for a trader to successfully negotiate volumes larger than what he owns and using only his own trading capital.
Explanation Leverage effect
A multitude of novice traders would define leverage as a line of credit that a CFD broker gives to its customer. This is not exactly true, as the lever force does not have exactly the same characteristics that are attributed to the credit. First of all, when you negotiate with leverage you don’t actually expect that you would pay any credit in return. That is to say you are simply forced to close your position or keep it open before it is closed by margin call. In other words, there is no specific delay in using your leverage force provided by the broker. On the other hand, there is also no interest on the leverage effect. Instead of that FX swaps are usually present for your overnight positions. However, unlike regular loans, forex payments can also be profitable for a trader.
In summary, the leverage is a tool that increases the size of the maximum position that can be opened by a trader. It must remain ductile and never rupture with a “stop loss” reached. Moreover the “take profit” must be positioned judiciously. Now that we have a better understanding of the leverage effect, let’s see how it works in concrete terms with an example.
How does the leverage work?
Forex Leverage Effect
Take the example of traders who own 1.000 USD on their trading account. Generally, 1 lot on MetaTrader 4 is equal to 100.000 currency units. As it is possible to negotiate micro lots according to the platforms. Moreover, a deposit of this size would allow a novice trader to open micro lots either 0.01 for a single batch or 1.000 currency units, without placing a leverage effect. However, as a trader would work to acquire a 2% return on investment on each position, it could only be equal to $20 US dollars. This is why a multitude of novice traders choose to use the debt ratio, also known as the leverage effect in their trading. So the size of the trading position and the profits could be higher.
Leverage Forex Effect Example:
Suppose a trader has 1.000 USD on his account balance and wants to negotiate large amounts while his forex broker provides him with a leverage of 1:500. In this way, the trader can open a position equivalent to 5 lots, when the account is denominated in USD. In other words, 1.000 USD * 500, faculties a maximum size of 500.000 USD for the position. Further the trader can actually ask to take orders of 500 times the size of his deposit. Most importantly, this is an important point to take into account in understanding the forex leverage effect.
In this way, if a leverage effect of 1:500 is used, the trader would make 500 USD instead of 1 USD. It is of course important to declare that a trader can lose the funds as quickly as it is possible to earn them.
Now as we have understood the theme dedicated to the explanation leverage with a practical example, let’s take a little time to find out what is the best possible level of leverage to use in your forex trading.
Which leverage effect to use?
It is hard to determine the best level to use, since it depends mainly on the trader’s trading strategy and its vision of the market friselis. The carelessness must not point his nose.
A general rule:
Longer you expect to keep your position open, the smaller the leverage should be.
This would be elementary because the longer the positions are open, the larger the market movements are expected. However, when you are looking for a position in time, you want to prevent the stop loss from being reached. Conversely, when a trader opens a position and assumes a timing of a few minutes or even seconds to close it, it mainly seeks to get the maximum profit in a limited time.
Which leverage choose for Forex in this case?
Usually such a person would seek to use a strong leverage, or in some cases, the highest possible leverage to ensure the greatest benefit by negotiating small market fluctuations.
From this case we can see that the ratio of the forex leverage depends heavily on the strategy that is going to be used. To give you a better overview, speculators on the day and beginner traders of breakout try to use a strong leverage effect, seeking fast orders and small movements. For instance the resulting bruxism must be mastered. Beginner traders of positions or swing trading often negotiate with little lever force to see without. Therefore A desired lever force for a trader usually starts at 1:5 and rises to 1:20. When they do scalping, usually novice traders tend to use a leverage effect that starts at 1:50 and can go as high as 1:500.
The knowledge of the optimum leverage is essential for a winning and serene trading strategy, we do not wish to trade too much, but always be able to accumulate the maximum of winning orders. For instance usually one advises a impavide trader to experience the leverage effect for his strategy for some time to find the best ratio.
The leveraging effect offered by online brokers
Unlike futures contracts that do not offer or offer a tiny leverage effect, the offers of FX brokers are a multitude more interesting for the novice traders. To clarify who are looking to negotiate large sizes. For instance it is hard to indicate the size of the lever force to be used generally, yet most Forex broker leverage effects start 1:100 and the average is at 1:200. There are a multitude of CFD brokers that can provide 1:500 leverage.
Also, in very rare cases it is possible to open an account with a broker that provides a maximum forex leverage of 1:1000-gold, there is not a multitude of novice traders who would actually want to use this debt factor at this level.
Is it possible to trade without leverage ?
Yes, it is. If you hold on your trading account the amount of the contract you invest in the financial markets, your leverage is equal to 1-in this case you do not have leverage.
How to change the leverage effect in its trading?
Once you start trading with a certain broker FX, you may want to see the forex leverage calculation or change the level of leverage available to you. This depends on the online broker and we can not answer this question for each market participant.
Another important aspect to remember, the leverage is related to the level of depositing the account, sometimes by dropping additional funds into your account, the leverage effect can be reduced. But example, a stock broker can provide leverage 1:500 on deposits below 1.000 USD and leverage of 1:200 on deposits between 1.000 and 5.000 USD. Once a trader has 950 USD and opens 3 lot positions on the EURUSD, he may decide to deposit a little more to support a required margin.
The risks of the leverage effect
It is important to remember that using the leverage is a risky process and that your deposit can be lost quickly by negotiating the use of strong leverage effect. A quick reversal of the trend may appear insidiously and the leverage will increase the losses. Really try to avoid any level of leverage before you have enough experience and avoid a recant of savvy trader. Central banks must be monitored to avoid an unforeseen market reversal.
As a blacksmith who takes precious time to wield and mould his metal to get the best shape. An apprentice trader must analyze the market before determining his trade. Ditto for its entry point, its exit point and its lever. However we hope this article has been helpful to you and that to date you have clearly understood the nature of debt ratio, and how to calculate the forex leverage effect without forgetting how this can be both useful and detrimental to your strategy of Trading according to your use.
A soon on the Forex blog