Leverage in Forex
The reason many traders' accounts are wiped out is not due to a poor trading strategy or market situation, but rather a simple lack of knowledge of the fundamental terms and operating principles of the broker providing you with services for accessing the interbank market.
One of the most important concepts that a trader must be able to use correctly is leverage in Forex margin security, as well as the concept of true leverage.
You should pay special attention to leverage and margin, as these are two key factors that can affect the profitability of your trading.
Forex leverage: its origin and calculation principles
Minimum requirements vary depending on the type of exchange, but typically this amount is in the tens or even hundreds of thousands of dollars.
To increase traders' trading opportunities and allow ordinary people with small capital to earn money in the market, brokers invented leverage.
Forex leverage is a system of borrowing money from a broker to gain access to the interbank market. When you open a trade, the broker multiplies your initial deposit by a certain ratio set by the company's regulations.
At the moment, companies offer leverage in the range of 1:50 to 1:1000. Thus, with a $100 deposit and a leverage of 1:1000, the broker will allow you to enter the market with a volume of not $100, but $100,000.
However, it's important to understand that no broker will risk their own funds. Therefore, by choosing huge leverage and opening a trade with a large lot, you could very quickly lose your deposit.
Because the moment the loss exceeds your deposit amount, the transaction will be automatically closed.
Margin security for a transaction
Margin is the minimum deposit required by a trader's broker to open a leveraged trade.
To calculate the required margin, divide the position size by the provided leverage. For example, let's assume you're using 1:1000 leverage and open a $100,000 position.
In order to broker fulfilled your request, your account should contain 100,000/1000 = 100 dollars.
It's important to understand that these funds are taken as collateral and are not added together in any way when you incur a loss. While you can open a trade with this deposit size, you won't be able to hold it for long.
Real leverage
When you register your account and select leverage, you receive a nominal value, not the actual leverage. For example, if your deposit is $10,000 and you open a position worth exactly $10,000, what leverage does the broker use?
That's right, none, because you opened a position exactly for the value of your deposit and nothing more.
If a trader opens an additional position for 10,000, their leverage will only be 2:1, not the stated 1:500. Therefore, it's important to understand that true leverage is a floating value.
In conclusion, it is worth noting that leverage and margin play a very significant role in building a system capital management.
Therefore, a lack of understanding and unwillingness to take these two most important factors into account during the trading process can lead to very tragic consequences for every trader.
