Leverage | Trading with leverage | What is Leverage.

Leverage | Trading with leverage | What is Leverage.

Leverage – It is a mechanism that allows you to trade larger position sizes than your trading account balance, and it is referred to as 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 the broker as well.

Almost when trading using it, you are effectively borrowing from your broker, while the funds in your account act as collateral.

It is the trade size “multiplier”, and Because the market moves in such small amounts, we need to magnify the trade sizes.

Your broker “lend” you additional capital, although no money changes hands.

 Brokers can offer a wide range of contribtion, anywhere from 1:1 to 2000:1.

For example, when you buy a house on credit, you are leveraging your 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 more significant 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 Contribution with Formula.

Standard Lot and Leverage

You are going to trade a standard lot of pair GBPUSD if you chose 100:1.

So what will be your contract, margin, and Margin Level?

We calculate the below formula.

Leverage = 100:1.

Price = Bid 1.2350 Ask 1.2353.

Contract = $ 100,000.

Equity = $ 5000.

Whole Contract Price if you use 1:1, 100000 X 1.2353 = $123530.

So you chose 100:1 and what will be the contribution of both Trader and Broker.

Margin = Contract / Leverage.

M=$100,000/ 100 = $1000(Trader Contibution or Margin).

Now you ninus $1000 margin from contract price = $123530 – $1000 = $122530. (Broker’s Contribution Or Leverage)

Contract = Margin X Leverage.

C= $1000 X $100 = $100,000.

Leverage = Contract / Margin.

L= $100,000 / $1000 = 100..

Margin Level = Equity / Margin * 100.

ML = $5000/ 1000 * 100 = 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 a margin of $1 K in your account.

If, for example, you make a trade to buy one standard lot of GBP/USD at 1.2353 and price moves up 1% (123 pips) to 1.2476.

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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About Muhammad Shahid

My name is Muhammad Shahid, MBA in Finance from IBA, University of Sindh, Professional Forex Trader & Trainer, I have taught more than 850 Students throughout the Sindh.

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