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Introduction to Leverage

Discussion in 'Forex Beginner Q&A' started by prav, Dec 12, 2008.

  1. prav

    prav Moderator
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    Leverage or gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, so as to attempt to increase the returns to equity.

    Leverage is a ratio between the total capital available for trading and the actual capital that you have on your trading account. For example, a ratio of 100:1 means that a broker would lend you $100 for every $1 of your actual capital. Therefore, you can control $100,000 with an account of only $1,000.

    High leverage maximizes potential profits. For example, if you use your $1,000 to buy USD/CHF and the exchange rate goes up by 100 pips from 1.1000 to 1.1100, your profit would be equal to $10. Had you used the 1:100 leverage instead, the return from the same trade, with the same starting capital, would have been $1,000. Of course, higher leverage also increases potential losses. Had the USD/CHF fallen by 50 pips, you would have lost a half of your starting capital with the 100:1 leverage.

    Although you technically borrow huge amounts of money from a forex broker, you can never lose more than the actual capital that you have in your trading account. If the account falls to below the minimum amount required to maintain an open position, you will receive a margin call and your positions will be automatically closed to prevent further losses.

    Note: We recommend to have at least $1,000 to open Micro account, $10,000 to Mini Account & $100,000 for Standard Accounts. And margin calls depends on leverage and minimum amounts to open position.
     
    #1 prav, Dec 12, 2008
    Last edited: Dec 12, 2008
  2. Sayen Aylen

    Sayen Aylen New Member

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    Leverage is clear to me can you elaborate what is margin call and is this facility provided by all the brokers. I mean I read it in various site and could not get it. please explain it with a simple example.
     
  3. prav

    prav Moderator
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    Margin trading refers to the leverage amount given to the traders to trade in the market. One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin.

    [​IMG]

    You get 1:1 margin for stock exchanges, 2:1 margin for equity trading, 15:1 margin for futures market; but in Forex, normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.

    Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

    For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

    The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

    Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. This in turns magnify the ROI dramatically.

    Another Example:
    So what is margin call? Example you are trading 1 standard Lot with USD as the base currency and your account is $1000 USD. You have arranged with the broker a 100:1 leverage. This means you need as a minimum your $1000 as your margin. Once you have opened your trade and as it is trading the currencies spike against you and all of a sudden your margin is showing as $50 or less, at this point the broker will either contact you or make the call to close the trade.

    This limits his risk because you have deposited $1000 and your losses of $950 are covered. It can also be beneficial to you because if you are letting your losses run too long hoping it will turn around you could lose a lot of money, which you might not have. So what happen when you leave a trade open over night?

    What happens is simple any trade that is open is automatically “rolled over”. That way the trade is not closed and there is never any actual delivery of the currency. Most brokers will do this automatically and it will just keep happening. The point to note is the brokers will charge you interest if there is any differential between the interest rates of the country.
     
  4. Sayen Aylen

    Sayen Aylen New Member

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    ok now its quite clear to me that what is margin call?Thank you so much.
     
  5. herry_fxhope

    herry_fxhope New Member

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    Thank you about your information
     
  6. Jacq Stone

    Jacq Stone New Member

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    This is one reason that some traders love Forex so much. Most Forex brokers offer largely leveraged accounts so up to around 1000:1. This increase your wins win and magnifies your loses when lose. If done right, though, these leveraged accounts can lead to big pay days.


    Please feel free to come and visit our FB page for more latest news and updates that will help you guys to improve your decision making.

    http. www. facebook. com/pages/Ikofx/213186568697555



    FOREX
     
  7. hugo30

    hugo30 New Member

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    I guess such leverage can kill your deposit very quickly. 1:1000 is a very big leverage. I wonder how can anyone trade with 1:2000 or even 1:3000.

    My choice is less 1:500 (so about 1:150 - 1:200). You can feel yourself free in trading, and it's not too risky.
     
  8. hugo300

    hugo300 New Member

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    Leverage or gearing is borrowing money to supplement existing funds for investment in such a way that the potential positive or negative outcome is magnified and/or enhanced. It generally refers to using borrowed funds, so as to attempt to increase the returns to equity.

    Leverage is a ratio between the total capital available for trading and the actual capital that you have on your trading account. For example, a ratio of 100:1 means that a broker would lend you $100 for every $1 of your actual capital. Therefore, you can control $100,000 with an account of only $1,000.

    High leverage maximizes potential profits. For example, if you use your $1,000 to buy USD/CHF and the exchange rate goes up by 100 pips from 1.1000 to 1.1100, your profit would be equal to $10. Had you used the 1:100 leverage instead, the return from the same trade, with the same starting capital, would have been $1,000. Of course, higher leverage also increases potential losses. Had the USD/CHF fallen by 50 pips, you would have lost a half of your starting capital with the 100:1 leverage.

    Although you technically borrow huge amounts of money from a forex broker, you can never lose more than the actual capital that you have in your trading account. If the account falls to below the minimum amount required to maintain an open position, you will receive a margin call and your positions will be automatically closed to prevent further losses.
    [​IMG]
     
  9. vic84

    vic84 New Member

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    although seems good, leverage can make you empty handed on a given day, when your prediction just did'nt work....
     
  10. sininfinity

    sininfinity Active Member

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    Leverage should never be abused. It is a double edged sword and can harm you if used improperly.
     
  11. 4xbug

    4xbug New Member

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    I better suggest new traders should not try using high leverage as they might be unaware of the market so trying higher leverages can bring higher damages too.
     
  12. platinumtraderfx

    platinumtraderfx New Member

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    Thanks for your inputs but frankly couldn't find in your dark side of using high leverage. Here is a good article that explains it http://bit.ly/1UcTSSk
     
  13. sininfinity

    sininfinity Active Member

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    A good suggestion. But then they won't know how leverage can be damaging if it is abused. When trading on a demo it would be good to test various types of leverage, so they would know how it impacts on their capital.
     
  14. 4xbug

    4xbug New Member

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    Yes i guess you are right we can test it on a demo account to make sure how it works, moreover demo trading accounts are free stuff provided by any broker to back test any strategy before applying it to live accounts.
     
  15. Mistalee

    Mistalee New Member

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    Thanks for sharing such a useful post here, it is quite helpful for the newbies and it cleared somewhat my doubts too.
     
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