Leverage on Forex
The reason for the loss of many traders' accounts is not a bad trading strategy or market situation, but a banal ignorance of the basic terms and operating principle of the broker who provides you with services to enter the interbank market.
One of the most important concepts that a trader should be able to correctly operate is - leverage in Forex, margin collateral, as well as the concept of true leverage.
You should especially pay attention to leverage and margin, as these are two key factors that can affect the profitability of your trading.
Leverage in Forex. Reason for appearance and principle of calculation
Depending on the type of exchange, the minimum requirements vary, however, as a rule, this amount is calculated in tens or even hundreds of thousands of dollars.
In order to bring trading opportunities closer to traders and allow ordinary people with small capital to make money on the market, brokers invented a lever.
Forex leverage is a system of borrowing money from a broker in order to gain access to the interbank market. The essence of leverage is that when opening a transaction, the broker multiplies your money volume by a certain coefficient established by the company regulations.
Currently, companies offer leverage in the amount from 1 to 50 to 1 to 1000. Thus, having a deposit of $100 with a leverage of 1 to 1000, the broker will allow you to enter the market with a volume of not $100, but $100,000.
However, you should understand that no broker will risk their own funds. Thus, by choosing a huge leverage and opening a trade with a large lot, you can say goodbye to your deposit very quickly.
Because the moment the loss exceeds your deposit amount, the transaction will be automatically closed.
Margin security of the transaction
Margin collateral is the minimum amount of a trader's deposit, which is charged by the broker to open a transaction with leverage.
In order to calculate the amount of margin security, it is necessary to divide the position volume by the amount of leverage provided. As an example, let's say you use 1:1000 leverage and decide to open a $100,000 position.
In order to broker executed your request; your account should contain 100,000/1000=100 dollars.
It is worth understanding that these funds are taken as collateral and are not added up in any way at the time you receive a loss, and with this deposit size you will be able to open a transaction, but you will not be able to hold it for a long time.
Real leverage
At the time of registering your account and choosing the leverage, you receive its formal value, and not the true one. For example, if your deposit is 10 thousand dollars, and you opened a position with a volume of exactly 10 thousand, what leverage is used by the broker?
That’s right, none, because you opened a position exactly for the value of your deposit and nothing more.
If a trader opens another additional position for 10 thousand, then his leverage will be only 2 to 1, and not the stated 1 to 500. Thus, it is worth understanding that true leverage has a floating value.
In conclusion, it is worth noting that leverage and margin collateral play a very significant role when building a system capital management.
Therefore, misunderstanding and unwillingness to take into account these two most important factors in the trading process can lead to very sad consequences for every trader.