Typically, the forex market is used in the amount of leverage of 100:1 , or even more. However, if the value of the broker offers 100:1 leverage , it does not mean that you must use it to the fullest . In fact, the resourceful trader seize tempting offer only if all the risks clearly calculated , and the risk associated with large leverage , plays into the hands of the trader himself . This article focuses on how to use leverage and profitable without the hassle.
Concepts of margin and leverage
If the purchase of securities or foreign exchange trader uses capital borrowed from the broker or dealer , it is called “buying on margin”. Usually a trader puts some money on the brokerage account . Then the broker uses these funds as collateral , allowing the trader to make transactions , the size of which is several times the amount deposited .
Leverage , in turn, involves the use of other people’s money for the purchase and sale contracts or shares. If the broker offers 20:1 leverage , which means that a trader for trading allowed to borrow an amount 20 times the funds in the account . So, if the contract is worth 10,000 dollars , and the broker provides 20:1 leverage , a trader to buy this contract need only $ 500 of their own funds. If the contract is more expensive to 11,000 dollars , the profit is $ 1,000 Yield contract is 10%, while return on equity – 200%.
Using leverage is so popular in the forex market as forex is the largest and most liquid financial market in the world, and open and close positions here very easily. This allows the trader to have some control over the amount of damages . It allows ease of closing positions forex brokers provide their clients the benefit of a large leverage.
Forex vs. market securities and futures exchange
The amount of leverage in forex many times more than in other markets. For example, when trading stocks allowable size of debt capital is twice the amount of their own funds in the account . As for futures , the maximum amount of leverage is 20:1 . When trading forex because of the large amount of leverage broker or market maker ( Quoted market participant ) will require to sign an agreement which will stipulate the conditions of closing a losing position . As the use of high leverage is associated with a higher risk for makret maker and trader , it is usually the agreement provides for the automatic closing of a position if losses reached 75 % of the margin or deposit . Also, in order to secure a broker and does not force the trader to replenish the account , losing position is automatically closed at the time when the loss may exceed the available amount in the account.
That is why traders should to pay special attention to the content of such agreements , to understand exactly under what conditions will be closed unprofitable position opened using leverage.
Why not use a margin completely?
Usually available margin is not fully utilized . To leverage resorted to only when the trader is confident in winning position. For example , you must always have a clear plan on exactly when to close the position if the market turns in the opposite direction from the desired direction. Once the value of each pip is defined, it is possible to calculate the potential loss if the price reaches the stop-loss and it works . Typically, this figure should not exceed 3% of the capital employed . If leverage is too high and it appears that the potential losses may amount , for example, 30% of the trading capital , you need to decrease the amount of leverage so that potential damage does not exceed 3%. Every trader their understanding of the level of risk , so it is possible deviations from the general recommendations of 3%.
Also, the trader should be aware that the more money it operates , the easier it is to use leverage safely. Because when you use leverage to lose money as easily as they earn , the trader should have enough money in reserve to avoid automatic liquidation of positions in unexpected price hikes .
Specific risk using leverage is that for the purchase or sale contract used borrowed capital . And if the market will turn unfavorable , the losses will increase in proportion to the magnitude of leverage.
How to determine the amount of debt capital?
Assume that the trading account is 10,000 dollars and the trader intends to trade 10 mini lots for the pair USD / JPY. Movement of the pair on one pip using mini account is worth about $ 1 . If you trade 10 mini lots change of course by 1 pip costs about $ 10. 100 mini lots will increase the value of 1 pip to $ 100. So, triggering stop-loss of 30 pips from the entry price can bring a loss of $ 30 per mini lot , $ 300 – 10 mini lots and 3,000 dollars per 100 mini lots . Thus, if a trader has $ 10,000 in the account , and the maximum risk per trade is 3% , you should only lend no more than 30 mini – lots, even if funds permit to buy or sell more.
Conclusion
Trading on the Forex market provides many opportunities for profit. Leverage can significantly multiply these odds. However, the use of borrowed capital requires the trader a clear understanding of the principles of risk management , as well as a clear location of stop-loss . Moreover, the trader must be extremely disciplined to follow the necessary rules and be able to use leverage to their advantage . Positions opened leveraged can become a trader as a real gem and a complete failure – it all depends on the mentality and shopping habits of each individual . Successful traders have good discipline and strictly adhere to the rules of risk management.