Leverage in Forex Trading
Leverage in trading simply refers to the ability to increase the size of your trade or investment by using credit from a broker and this credit not required any interest from broker as well. When trading using leverage, you are effectively borrowing from your broker, while the funds in your account act as collateral. This collateral is referred to as margin.
Leverage is the trade size “multiplier”.Because market moves in such small amounts, we need to magnify the trade sizes. Your broker “lend” you additional capital, although no money changes hands. Your broker “lend” you additional capital, although no money changes hands. Brokers can offer wide range of leverage , anywhere from 1:1 to 2000:1
For example, when you buy a house on credit, you are actually leveraging your personal balance sheet. Let’s say you wish to buy a $200,000 house but you don’t have that much cash on hand. So you put a 20% down payment of $40,000 on the house and make regular payments to the bank. In this case, you are using a small amount of cash ($40,000) to control a larger asset ($200,000 house).
In the stock market, many margin accounts allow you to lever up your purchases by a factor of 2. So if you have a $50,000 deposit into a margin account, you are allowed to control $100,000 of assets.
Trades in the Forex Market by Leverage with Formula
- To find Margin = Contract 0r Lot Size / Leverage.
- To find Contract Or Lot size = Margin X Leverage.
- To find Leverage = Contract o r Lot Size / Margin.
- Margin Level = Equity / Margin * 100
- Leverage = 1:500 M=$10,000 / 500 =$20
- Lot Size = $ 10,000 LS=$20 X 500 = $10,000
- Margin = ???? L = $10,000 / $20 = 500
In our first example, we’ll assume the use of 100:1 leverage.
In this case, to trade a standard $100K lot you would need to have margin of $1 K in your account. If, for example, you make a trade to buy 1 standard lot of USD/CAD at 1.0310 and price moves up 1% (103 pips) to 1.0413, you would see a 100% increase in your account. Conversely, a 1% drop with a standard 100K lot would cause a 100% loss in your account.
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