If you are a novice trader, then you can’t do without learning to understand the terminology that exists in Forex, even the simplest one. Note: to understand and be able to properly apply are two different things. Because today we consider one of the main concepts in forex: leverage.
- Leverage is the ratio of the cash of a trader that he invests into an account opened with a brokerage company to the amount that a trader can actually manage.
That is, if the trader has 1 cu (conditionally), and the leverage is 1: 100, this means that the trader can enter into transactions with lots in the amount of 100 cu In other words, 99 cu the broker seems to be lending, although this is a very conventional concept.
The broker determines the maximum leverage, as well as the size of the minimum deposit. By the way, often these criteria are fundamental when choosing a broker. Leverage 1: 100 is the maximum allowable on the currency exchange.
How leverage works
It is logical to assume that the larger the amount of the lot, the greater the profit you can get in the implementation of the transaction. In other words, if the exchange rate fluctuates by 1% from 1 conventional unit. you will receive only 1 cent, whereas thanks to 1: 100 leverage you will receive income immediately in 1.U.E., thus immediately doubling your real investment.
It would seem, what a profitable offer: thanks to the loan, to receive immediately 100% of the yield. However, in addition to income, there is also the probability of loss. That is, if the currency pair swayed by 0.5% in the negative direction, you can lose only 0.5 cents with 1: 1 leverage, and you can immediately lose half of your investments with 1: 100 leverage. If the currency pair continues to fall, which is 1%, then with a 1: 1 leverage, your losses will be only 1 cent, with a leverage of 1: 100, you will immediately lose the entire deposit and the broker will stop your Forex trading.
Beginners who have not yet understood the principles of real trading should not risk funds and use such a kind of credit. For example, if you are a long-term strategist and rely on the fact that with a temporary drawdown the currency pair will grow in the long run, you can afford to draw down a pair by 2%, expecting a growth of 10%. With a deposit of 1 cu. with a shoulder of 1: 100 you will not have such an opportunity.
- The permissible risk share for a novice trader in the foreign exchange market should not exceed 5% of the invested capital.
To summarize, let’s say that Forex trading should not be emotional. Being collected and confident in the initial stage, a trader must, through trial and error, choose the right strategy, understand the trends in the market and the possibility of using this or that tool, and only then take a risk, including increasing the size of leverage. Moreover, the use of the highest ratio is justified only when you are confident in your decision or are willing to accept a possible loss.
Successful bidding for you, and remember: the mind should always be above emotions!