Learn forex - what is Leverage?

1. Learn Forex: What is Leverage? Leverage is a must-know term for beginning day traders because it can have a massive impact on profits and losses. So what is leverage? In forex trading, the movement of exchange rates is generally measured in tiny fractions called pips. In effect, a trader must trade larger volumes of the currency to actually generate profits. Forex leverage makes that possible without having to put all the money down up front. Essentially, a trader can leverage the balance of his account and borrow greater volumes of currency from a broker. So leverage, in the simplest terms, is borrowing funds from a broker to enter a trade. To make this possible, broker set a margin requirement, which is the minimum amount that must be in the account to make a trade, typically it’s about 2%. That means if the trader wants to trade a standard lot of $100,000 in USD, that trader would need at least $2,000 available in his account. At this rate, the trader’s leverage would be 50:1. Brokers may offer even higher leverage – up to 400:1 and as little as 5:1. And here’s why this is important: Higher leverage equals higher risk. A trader that overleverages his account can quickly diminish his trading capital.

2. An Example of Forex Leverage An Example of Forex Leverage Here’s how leverage works in practice. Trader A and Trader B both have account balances of $10,000, which is their starting trading capital. Both expect the value of EUR/USD to go up and gain pips which are equal to $1 per 10,000 currency units (a mini lot).Trader A chooses to apply 50 times leverage on his trade to buy 50mini lots equaling $500,000, while Trader B uses a more conservative 5:1 leverage, buying five mini lots equaling $50,000. Now, if they were wrong, and EUR/USD lost 100 pips, both would experience losses. But due to leverage, Trader A’s losses would be exponentially more significant. In our example, Trader A would lose $5,000, because for each pip lost, he loses $1 for each of the 50 mini lots he holds, and 50*100 = $5,000. That’s half of his trading capital. Trader B, though, would lose just $500, as his leverage diminished the risk. For every pip lost, he loses just $5 – or $1 for every mini lot he holds –and $5*100= $500. That’s just 5 percent of his trading capital. Pros and Cons of Margin Pros and Cons of Margin- -Based Trading Based Trading Because the exchange rates for currency pairs make tiny movements each day, leverage exists to make it possible to maximize the size of a trade to capture more of these tiny profits. Thanks to leverage, traders don’t need huge account balances to make a living. But leverage also exposes traders to much greater potential losses. Some brokers offer leverage all the way up to 500:1, and at that rate, the trader must know what he or she is doing. Overleveraging your trades can quickly wipe out your trading capital in a single day, especially during volatile market swings. It’s extremely beneficial to

3. understand how leverage works and learn to develop a strategy for minimizing risk before you invest large amounts of money in Foreign Currency Exchange. Information Provided By Learn To Trade