Leverage

As you know, trading in the Forex market requires certain investments. Often starting investors have a reasonable question: "How much money do I need to put in the account for normal trading?" When buying or selling any currency pair in each application, it is necessary to indicate the number of currency units (volume) that will participate in the forthcoming trade deal. 1 lot is usually equal to 100 000 units (for the InstaForex broker it is equal to 10 000.) The minimum volume for a trade is 0.01.If the current exchange rate of the euro to the dollar is 1.29 (and by Forecasts, he should grow a little), Then for the purchase of 0.01 lot will require an amount of 1.29 * 100 000 * 0.01 = 1290 dollars.

Are there many traders who have an initial deposit of more than $ 1000? The answer is obvious. And so all brokers offer to use the leverage when opening an account; The ability to trade a larger amount than the one that is on deposit. The size of this shoulder trader has the right to choose on his own. On average, it fluctuates in the range 1:20 - 1: 500, and in some brokers this parameter can generally reach 1: 1000.

Forex without a leverage is possible in principle, but this option is good only for those who adhere to the conservative style of trading and has relatively large funds for financial activities. And the vast majority of traders need leverage, since without it, they would not be able to work in this highly profitable market.

Among many investors there is an opinion that the leverage of a trading account is directly related to the risk of loss of savings: the larger its size, the greater the risk. This is true, but only partly. In order to clearly explain what a leverage on Forex is, let us consider an example. Suppose we have two accounts with the same amount of starting capital ($ 1000), but with different parameters: account number 1 has a leverage of 1: 100, and account number 2 is 1: 500.

We are 99% confident that EURUSD will grow by 50 points in the near future and want to buy the maximum volume at the rate of 1.2980. In the first count, we can buy 1000 x 100 / 1.2980 = 77041.6 or 0.77 lots. In this case, an increase of 0.0001 would mean an increase in our capital by 10 x 0.77 = 7.7 dollars (1 point for 1 lot EURUSD is 10 dollars). If the rate rises to 1.31, we get (1.31-1.2980) x 10,000 x 10 x 0.77 = 924 dollars. Our deposit has almost doubled.

In the second account, the maximum volume will be 1000 x 500 / 1,298 = 385208 units or 3.85 lots. The price increase for 1 point will bring $ 38.5, if you close this deal at 1.31, the profit will be (1.31-1.2980) x 10,000 x 10 x 3.85 = $ 4620. It turns out that the deposit has increased almost five times! Impressive, is not it?

However, a trader can not always accurately predict the future course movement, and here a large leverage can play a cruel joke - only about 25 points in the opposite direction will almost completely destroy the initial deposit. After all, in this case, the losses will be 3.85 x 10 x 25 = 962.5 dollars. In such situations, the broker forcibly closes the unprofitable transaction, and no prayers will help to return the lost money.

If we open positions in our two accounts with the same volume (for example, 0.1 lots), then the risk in both cases will be the same, and the leverage will not affect either the amount of profit or the amount of possible loss.

Which of these is the conclusion? And the big and small shoulder has its advantages. A large shoulder is useful when taking part in competitions and is good at scalping, and a small one will make trading more comfortable and reduce the risk of big losses. Beginners are usually recommended to use 1: 100 or 1: 200. If you want to trade with the maximum possible leverage, in the case of real trading, when "hard" money (hard earned) is at stake, never use the maximum amount in operations, otherwise you will soon have to save money to replenish the account.