Don’t you know what leverage is in the Forex market?
The trading in the forex market is becoming more accessible to many retail traders. Everyone will have their reasons for trading in the foreign exchange market, but the leverage to operate in this market is one of the reasons that most attracts traders who choose the Forex market. In fact, more and more traders are deciding to trade in the forex market.
The financial appeceament is, in practice, to manage more money what you really have.
exist various leverage levels generally ranging from 1:30 to 1:500. A leverage of 1:500 means that you can multiply your investment on a currency pair by 500. But then where does this money come from? It is simply the broker itself that lends you this money for free, requiring only a small guarantee of the capital that you have deposited in your broker account.
This Forex leverage thing can initially be a bit confusing if you are a person who would like to start trading in Forex or CFDs. Leverage in Trading is a tool that allows you to invest for a face value much higher than the value of your resources used.
Calculate leverage in Forex
The formula to understand leverage or, also called margin, in the foreign exchange market is as follows:
Leverage = Position Size/Equity
When you open a position, whether buying or selling, the leverage in the market is constantly evolving, since it depends on your capital. If you make profits on your Forex positions, your leverage decreases as equity increases and if you make losses on your current positions, your leverage increases. I give you an example so that you understand it better:
- Initial deposit = 10,000 euros
- Maximum leverage provided by the online broker = 1:200
- €10,000 (initial deposit) * 200 (maximum leverage) = €2,000,000
And how to calculate the margin required by our broker?
The margin required by the broker, that is, the amount of funds that we have to provide as collateral, is the result of dividing the nominal value of the contract by the leverage.
Advantages and disadvantages of leverage
As we have just seen, the effect of leverage has some advantages. The main one is that it allows you to obtain more than interesting profits in a short time, especially if you trade Forex or CFD’s.
However, the effect of leverage also presents a risk that cannot be ignored. Indeed, while when you win your profits can be multiplied by the chosen leverage level, when you lose they can too. So, a position with a leverage level of €100 that loses one euro will actually make you lose €100. Thus, it is necessary to have enough capital in the trading account to cover these possible losses and know how to stop them at the right time.
Using a level of leverage is still a very advantageous method but it requires good money management to limit the risks and not put all of your capital at risk due to poor money management. At Traders Business School, we recommend you get a good education, learn all these concepts in a demo account and with the support of a tutor, mentor, teacher, call it what you want, but don’t jump into real trading without having put your money management on demo , and with the same capital that you plan to operate when you go to real.
If you want more information about leverage, we explain everything in the following video: