Leveraging a position involves decreasing the guarantee, known as margin, to occupy a position of greater value. Forex brokers that offer no leverage option offers up to 400 to 1.
Leverage.
Leverage is shown in a form of relationship, that is, for example like this: 100:1
This means you can trade 100 units of currency having only 1 unit available in the account. In other words, the trader only needs $ 1,000 to $ 100,000 trading
How is this possible? In forex trading, trading currencies established, the amount that a currency change on any given day is quite small. Leverage is a necessary feature in the Forex market not only because of the magnitude of capital required to participate, but also because the major currencies fluctuate on average less than 1% per day. Without leverage, the Forex does not attract capital. Brokers allow greater market share to investors according to their investment skills.
In fact, the very concept of leverage is what makes possible the existence of many brokers with trading table: they have accounts with different banks that serve as liquidity providers, as well as lenders of first-order trading margin. This means that the bank allows the broker to trade with larger sums to the deposited and this in turn transfers that benefit the user. Again, the deposit is a guarantee given to the bank that defines the maximum risk.
Now talk about the margin.
Margin Forex, is almost the same, but seen from another perspective. The amount of money in the account as collateral needed for trading in percentage terms as 1%. Each broker can establish different margin requirements. Is calculated according to the size of the trading and leverage. For example, if we trade with a lot and have a 100:1 leverage on the previous example of leverage, we can handle 100 times our investment. You say I can trade only 1.000 100.000, or in terms of scope, means I need to have the equivalent of 1% in the trading account. Ie 1.000 to trade 100,000 (1%).
The free margin is one available for trading.
The range used for leverage is not a payment or purchase of assets. It is rather a good faith deposit to ensure any losses in trading.
If your losses leave their free margin below the margin required to cover open positions, your broker will make a margin call and close all your trades. As its trading is these moments add significant losses proceed to close trading as a safety measure to prevent the broker to end negative balance. This is done by the trader and of course, by the broker, you prevent anyone end up owing money to anyone.
Leverage then has many effects:
• Allows you to invest more. If you invest more, their prospects are proportionally stronger.
• If you invest more, you will need to adapt their trading strategies and always be aware of the range used. You should never reach 100% margin used. Otherwise, this means you no longer have enough room to trading, and the system automatically cut their positions. This automated measurement, is there to prevent you from losing capital than it has.
Example:
A trader has $ 10,000 in cash. The trader buys 1 lot of EUR / USD at a price of 1.2750, with up to 100:1 leverage, given the opportunity to trading as if I had $ 1,000,000.
However, in a regular account, a lot is $ 100,000 of base currency. Therefore, to buy 1 lot of EUR / USD is getting $ 100,000, but is only required to invest $ 1,000 of your $ 10,000 capital. ($ 1,000 x 100 leverage = $ 100,000).
So now you have $ 1,000 to $ 9,000 range used in margin.
If the position makes money, earnings are added to the difference in the trader's account. Similarly, if the position goes against the trader, the losses are subtracted from the total difference of the account. If the price moves 100 pips in favor of the trader (the exchange rate moves up one cent to 1.2850), the trader would earn a profit of $ 1,000 ($ 10 per pip × 100 pips). The trader has increased by 10% as your account with only one transaction.
As opposed, if the position had been at least 75 pips against the trader had lost $ 750 for a new balance in his capital of $ 9.250.
Now if the trader had over leveraged and have bought 6 lots ($ 600,000 of base currency) and the trading goes against what was planned, generated a loss of $ 6,000 (6 lots of 10 pips each lot for 100 pips of loss ), would have been closed off due to a margin call when the difference in your account had fallen below your margin requirement assuming the margin requirement is 10% by lot. Ie for each lot, need to have your $ 1,000 balance. If you lose $ 6.000 as in the previous example, your balance remains at 4,000, closing the position even before it reaches the 100 pips lost per batch.
Leverage is a double edged sword. Can help you get significant benefits can also cause huge losses. Therefore, as Forex traders, we use the leverage to achieve substantial benefits. Profit through limited capital is very difficult, this even if you get the right trend in the currency market. That's why you need a broker that provides leverage so that in this way can trade effectively in the currency market. The way to prevent substantial loss as margin calls by their broker, is through the correct use of stop loss orders. (Stop-Loss Orders).
Therefore, when choosing a broker, consider the leverage it provides, as this could be your ally to win big. At the same time, do not abuse it.
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