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Forex Leverage for Beginners

Forex Leverage for Beginners.

Forex trading is no more risky than trading stocks or commodities. Those who call the currency market highly risky fail to differentiate between the market and the participants. The majority of Forex traders fail and the overuse of leverage is one of the reasons it happens. Most beginners in the Forex market do not know how to use leverage to properly manage risk.

Don’t think that just because Forex brokers allow you to use high leverage with a low minimum deposit that you can “Get Rich Quick“. Having an aim of trading profitably is not about making your millions by the end of this month or this year.

Forex traders and investors are offered the opportunity to play the market with a high degree of leverage. In the stock market leverage is typically to 2:1, meaning you can buy twice as much stock as you have cash in your account by borrowing the difference. In Forex it is possible to trade at 50:1 or higher leverage up to 500:1.

A highly leveraged Forex trade can quickly delete your trading account. The greater the amount of leverage on investment capital you apply, the higher the risk that you will assume.

Let’s illustrate with an example:

Trader A
Mini Forex Account
Trader B Trader C
Balance $1,000 $10,000 $10,000
Real Leverage Used 500:1 50:1 5:1
Total Value of Transaction $400,000 $400,000 $40,000
In the Case of a 100-Pip Loss -$4,000 -$4,000 -$400
% Loss of Trading Capital margin call 40% 4%
% of Trading Capital Remaining 60% 96%

 

Trader A have a trading capital of US$ 1,000 and will trade Mini Forex account. Both Trader B and Trader C have a trading capital of US$ 10,000. After doing some analysis, all of them buy the EUR/USD at 1.3100.

Trader B chooses to apply 50:1 real leverage on this trade by buying US$400,000 worth of EUR/USD (50 x $10,000) based on his $10,000 trading capital. Because EUR/USD stands at 1.3100, one pip of EUR/USD for one standard lot is worth approximately US$10.00, so one pip of EUR/USD for four standard lots is worth approximately US$40.00.

If EUR/USD fall to 1.3000, Trader A will lose 100 pips on this trade, which is equivalent to a loss of US$4,000. This single loss will kill the Mini Forex account.

Trader C is a more careful trader and decides to apply 5:1 leverage on this trade by buying US$40,000 worth of EUR/USD (4 x $10,000) based on his $10,000 trading capital. That $40,000 worth of EUR/USD equals to just one-half of 1 standard lot. If EUR/USD rises to 121, Trader B will lose 100 pips on this trade, which is equivalent to a loss of $400. This single loss represents 4.15% of his total trading capital.

Refer to the table above to see how the trading accounts of these three traders compare after the 100-pip loss.

In general, the less leverage you use the better for you.
Keep in mind that first learn to trade profitably without leverage.

The extreme amounts of leverage that are common in the Forex markets. Experience traders know how to use leverage judiciously and to their advantage – this takes experience, time and diligence. Leverage size in Forex should be totally flexible and customizable to each currency trader’s needs.

forex leverage calculator

http://www.forex-broker.net/how-to-choose-the-right-leverage-in-forex-trading/

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