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leverage
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Understanding Forex Leverage, Margin And Lots
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Leverage

The leverage (leverage) is a concept not well understood by most people and probably for this reason it is considered dangerous. The forex market, being a market where you can enjoy the benefits of using a high leverage, by association is considered a very risky market. The reality is that the lever is only dangerous to those who do not know how to use, for others is a great ally.

If you look at the page of a newspaper that shows the daily percentage changes of the various markets it can be noticed as one of the currencies are less volatile financial classes with absolute daily changes around 0.5%. In actions but it is not strange to see daily changes of 2% or even much higher.

So why is the forex market is considered so risky?

Simply because to make a profit worthy of note, when the% change is so low, we must operate with a certain size and position to do so you must use the leverage.

The contracts in forex

In the forex market can be exchanged mainly three types of contracts that have a different value, 10 times larger than the previous contract. So negotiate 1 mini lot is equivalent to opening a position with Micro-10, while a standard lot is 10 and 100 Micro-minilotWithout leverage being available in my trading account the value corresponding to the contract that I want to negotiate. So just to negotiate a standard lot I should have $ 100,000, which the majority of private traders obviously can not afford!

Forex Leverage

Access to the forex market is then made accessible to private traders due to the leverage offered by brokers usually 1:100 or 1:200 is but it can also be greater.

What does it mean?

It means that I can, if they wanted to control larger amounts of the amount of my account.For example, with a leverage of 1:100 can open a standard lot ($ 100,000) with $ 1000, a penny the nominal value. Or to betray a mini lot ($ 10,000) will have access to $ 100.With a lever 1:1 (which is equivalent to having no leverage) if I invest $ 1000 a 1% change equals $ 10.With one lever 1:100 if I invest $ 1000 $ 100,000 so now we control the variation of ' 1% will be calculated on the nominal value, ie $ 100,000, which equates to $ 1000.With the leverage I can increase my return to investment (ROI) in an exponential manner: I invested $ 1000 with no leverage and I have obtained 10 (ROI = 1%), with the lever I have invested the same amount but I obtained my 1000 doubling the capital (ROI = 100%).

The danger of leverage

once heard this in the minds of most people takes the phrase "Cool! With the lever can multiply my profits! "And then what do they do? Make it an excessive and disproportionate, known issue with the term " over-leveraged . "

Leverage amplifies profits as also amplifies losses , therefore, as in the above example, if you invest $ 1000 to 1:100 with lever controls a position equivalent to $ 100,000. A variation in a negative 1% causes a loss of $ 1000 that is 100% of my investment!

The margin in forex

The scope defines the share capital to be used as collateral to open a trade.The margin is linked to the lever in a manner inversely proportional: the more leverage is high plus the required margin is low, conversely the more leverage is low, the higher the required margin.The formula to calculate the percentage required by the broker to the margin: Margin% = 100/times leverageAnd then the margin required for each trade is given by: Margin Required = Current price per trade unit exchanged * * Margin%

Margin and Leverage Ratio

Lever Margin

1:10 → 100/10 = 10%

1:50 → 100/50 = 2%

1:100 → 100/100= 1%

1:200 → 100/200= 0.5%

1:500 → 100/500= 0.2%

Ex: Suppose you have a checking account of $ 2000 if I operate with a leverage of 100:1, and buy a minilotto (par value $ 10,000) on EUR / USD.Margin% = 100/100 = 0.01 = 1%

Margin required for trade = 1.3630 * 0.01 = $ 10,000 * $ 136.3 $ 136.3 These or the equivalent in the currency of the account are "stuck" as a guarantee to cover any losses and can not be used to open new positions. What remains in my account also calculating profits and / or loss of open positions is defined margin used which can then be used to open new positions.

I open multiple locations simultaneously, plus my used margin will increase and the decrease can be used.When the usable margin reaches zero, the margin call and will start the broker automatically close / open positions to prevent it from losing more than I have in the account.

Now maybe it is more clear why the lever is dangerous if you do not know how it works. In fact, the risk is to open too many positions and / or positions are too large compared to their account. In case the market turns against us, the margin could be used by snapping to zero the margin call.

CONCLUSION:

We then leverage and leeway for what they are and let's not scare you.The lever is a tool through which we can have access to the forex market by being able to control the amounts that we could not negotiate otherwise.The margin is a requirement that the forex broker asks to cover any losses.Even if we have the ability to open several major positions, it does not mean that we are obliged to fully exploit it. And 'therefore advisable not to betray too much on the sidelines, but to apply the proper use of money management or risk being subject to a margin call.


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