The primary reason so many retail traders are lured to the Forex market in the first place is leverage.
Although you have probably already heard about this, it is so crucial for a beginner that we felt compelled to talk about it once again.
The forex market has developed into a bit of a nursery for “the get rich fast marketeers” and the many so-called gurus. And the primary lure they use is leverage.
What Is It?
Its is the capacity to manage a sizable sum of money with little or no of your funds and by borrowing the rest. In essence, it’s a loan from the broker that will provide you with more market exposure.
He could let you trade a $100,000 position, for instance, provided you put $1,000 into your brokerage trading account. Greater exposure and position equate to higher earnings (but also, your losses can be more significant).
What would life be like without leverage? Take a look at this:
Suppose you have $5000 in your trading account and wish to purchase shares of Amazon, Apple, or Facebook. You could purchase 43 shares of Apple, 18 shares of Facebook, and only one share of Amazon at the time this blog was being written.
You’ll get $500 if these firms see a spectacular 5 percent increase.
Can you picture it? Although it’s just $500, life without leverage is this.
How is life in the Forex market with leverage?
A leverage of 50:1 will give you control over 250.000 units of the base currency for the same $5000 account.
Lots are used for purchasing or selling a foreign exchange transaction, and a conventional lot is equal to 100,000 of the base currency.
How does it Leverage function?
As I usually advise, you should always set aside a predefined amount that you are willing to risk on every transaction while trading the markets.
Let’s suppose that each transaction will have a risk of 1% of the $5000 account. Fifty dollars would be equal to 1% of $5,000. Therefore, you will take a $50 risk utilizing the 1 percent.
- You are trading 2.5 lots with leverage of 50:1.
- Since each lot is worth $10 per pip, each pip is worth $25.
- Just two erroneous pips are permitted before you are stopped out.
- One standard lot, or 100,000, is controlled by a 20:1 leverage.
- $10 per pip for one lot. Only five pip are permitted before you are stopped out and lose your whole 1% account balance.
- Controlled by a 5:1 leverage ratio, 25.000 units are equivalent to 0.25 lots.
- With a $2.5 pip value, you may lose 20 pip before your stop loss is reached.
It increases risk and the likelihood that an investment may be stopped. You must be aware that risk and leverage are inextricably linked.
There is undoubtedly a coordinated attempt in the sector to safeguard clients like you. This enormous leverage might be fantastic when the markets are on your side, but it can destroy you when they are not.
That is both the strength and the risk of leverage. It may be used in your favor or against you.