Financial leverage

Forex market offer traders a financial leverage that benefits …

Forex market offer traders a financial leverage that benefits

from fluctuations in exchange rates between currencies. Forex Brokers offers some of the biggest leverage among marketable assets. The leverage effect means that the broker leases the capital to the trader who uses it to invest together with his capital. The financial leverage often ranges from 1:50, to 1: 200.

An example of financial leverage:

For a better understanding of the lever we can show an example of everyday life. Let’s say you buy an apartment for 200.000 USD, but you do not have the whole amount, so you make a bank deposit of 10% 20.000 USD deposit and then send it regular repayments. In this case, you use a smaller amount in cash 20.000 USD to control larger capital of 200.000 USD.

To calculate the lever size, we need to divide the required capital by the amount of the amount we want to use. In the above example, the leverage effect would be 10 times 200.000 USD / 20.000 USD = 10 X.

In Forex it works alike, but the levers are often much higher. So if you want to control $ 10,000 in capital, but your cash is only $ 1,000, just use 1:10. The broker will ask for 10% of your pocket and borrow the remaining 90%.

How to choose Financial Leverage size properly?

There is a relationship between the leverage used and the impact on your business account. The more leverage you use, the more capital swing it will cause on your account. On the other side, the smaller the lever you choose, the smaller surprises you are avoided. Therefore, we do not recommend using a lever higher than 1:10 in our editorial board.

Why is it better to use a bigger leverage? (or not)

If you use a high leverage when trading on Forex, a few unsuccessful trades can easily exceed many successful ones. Let’s look at this in the following example:

Merchant A bought 100 EURUSD, Merchant B bought 10 lots EURUSD

Market Fluctuation: The EURUSD price grov for 100 pips.

Trader A win 100% of his capital, while Trader B win just 10%

Summary:

The unquestionable advantage of the leverage effect is that best quality investments can be achieved with the help of low capital. For example, a leverage effect of 1: 100 will increase your investment 100x. However, the disadvantage is that you can do the same thing, so we recommend using a lower financial leverage up to 1:10 when trading on Forex Market. You must know, however, that you can prevent losses such as Stop Loss / Take Profit.

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