Skip to main content

How to Use Leverage Trading Currency Pairs

One of the top reasons you might have entered the world of forex instead of sticking with stocks and bonds is the concept of leverage. Through leverage, you can trade large amounts of money and either earn enough to trade without leverage (or even retire), or lose so much money that you immediately wipe out your trading account. You have to understand leverage trading before you try to participate in it, or else you're going to set yourself up to go bust.

The basics of leverage

If you trade in standard units of 100,000 units of currency and have a 1% margin, you need $1,000. Your leverage will be 100:1, which you can calculate by dividing the units of currency by the amount you are depositing (100,000 divided by 1,000 is 100, so the leverage is 100:1). Another example: if you were depositing $2,000 for the same trade, you would have 50:1 leverage.

Leverage is higher in the forex market than other markets, which is probably one reason you're trading in this market. The reason is because currency pairs are often more stable than company stocks or other forms of investments and don't rapidly appreciate or depreciate, allowing your broker to lend you the appropriate amount without undue risk to either you or the broker.

Risk and margin

Of course, the higher the leverage or the smaller your margin, the higher the risk. If you bought one standard unit with a $1,000 deposit and it increased in value by $1,000, you would have a 100% return (your initial $1,000 deposit divided by the $1,000 gain, then multiplied by 100 to get the percentage). Similarly, if the value decreased by $1,000 instead, you would have a -100% return and would quickly be broke.

The amount you deposit is the margin. If you deposit $2,000 on a $100,000 currency position, your margin is 2%. Margin generally varies depending on the broker, and can be anywhere from 0.25% to 5%. If your margin is 0.25% and you deposit $250 on that same $100,000, the tiniest change in the market can deplete your funds instantly.

Decide on your real leverage

The margin-based leverage on your account is less important than your real leverage – the 50:1 or 100:1 number, for instance. If you invest $1,000 in shorting $10,000, you will lose much less money if you lose pips on a currency rising in value unexpectedly than if you short $100,000. Instead of risking as much as you can, try to keep your investing goals in mind.

If you have spare money and you don't mind risk, by all means, get 50:1 or even 100:1 leverage and enjoy the potential profits – just be prepared to lose your investment quickly, too. For beginners or intermediate traders, it usually makes more sense to avoid highly-leveraged trades and stick to more reasonable leverage like 5:1, 10:1, or 20:1.

Now that you have a basic understanding of leverage, try leverage trading currency pairs as a potentially lucrative investment, and revel in not having to come up with the full amount to trade the market. Just don't be too hasty and rush into a trade without taking a good look at the leverage you're applying to the trade.

Resources:
http://www.investopedia.com/ask/answers/06/forexleverage.asp#axzz2ALj3MXN0
http://www.babypips.com/school/undergraduate/discovering-your-trading-profile/the-number-1-cause-of-death-of-forex-traders/
http://www.investopedia.com/articles/forex/07/forex_leverage.asp#axzz2ALj3MXN0

This Guest post is contributed by Stacy Pruitt, a freelance forex strategy and finance writer. Stacy writes about advanced trading and forex indicators. Click here for advanced videos on forex trading.

Comments

Popular posts from this blog

Why it’s important to save for retirement

While retirement may seem far off in the distance for some, financial experts say you’re never too young to begin saving.  In fact, the earlier you calculate your retirement needs and start building your nest egg, the easier it will be to create a viable plan for the future. Many experts advise you begin saving a percentage of your income for retirement as soon as possible, no matter how little the contribution may be, as it’s possible the Social Security benefits millions of people currently depend on may be in jeopardy.

Low interest credit cards - how to make them work for you

Credit cards are borrowing instruments, unlike debit cards where you already have the money. Banks are there to make money too. Just like high street stores, they hope to maximise their profits within the rules. So it’s important to understand the basics and find a credit card that’s right for you – you can compare low APR credit cards here . Now you know the rules, let’s find out how to play the game. The financial services industry charges interest on the money that it lends out. Let us assume you borrow £100 on your credit card and keep it for exactly one year before you pay it back. For the purposes of this article, we will assume your loan attracts 8% interest per year, which is the Annual Percentage Rate, or APR for that particular transaction. Practical example

Basics of Stock Markets: The A-Z Quick Sheet for a Beginner-Level Investor

Several individuals wish to engage themselves in stock market and invest their money in stocks, but they don’t have an idea about Stock markets and how they work . In fact, there may be lot of info available to you, but they may all seem confusing without actually knowing the basics. This post aims at educating the beginners about the basics of stocks market. Read on to enlighten yourself about the A-Z of stock market. 

Looking For Ways To Finance Your Next Building Project? Look No Further

If you need money to start your next building project, you may be quite surprised by the number of different options you have. However, the options that will actually be available to you will depend on many different factors and these factors will decide how eligible for construction finance you are. In this short article, we will look at what you can borrow, how you can borrow, and what restrictions you might come across. Please note that while the information in this post is correct, your own personal situation will determine what the best course of action is for you. Speaking to an independent financial advisor will help you to see if you are eligible for construction finance and how to go about getting it. Different Types of Mortgages Let’s start with the different types of mortgages that may be available to you. Remember, whether one is better for your needs than another depends on many factors. Commercial Mortgages Let’s start with commercial mortgages because they a

Four factors that have fuelled city-centre living

Urban centres have become increasingly popular in recent years as both residential locations and as commercial space. This social change has been driven by a number of factors and has been reflected in the number of new property developments springing up in major cities around the UK. As space tends to be at a premium in urban areas, it has led to the construction of a greater number of apartments; potentially fuelling interest in block of flats insurance . So why have so many people decided that an apartment in a town is a better place to live than a larger house in the country? Here are four factors that are likely to have spurred on the rush for the city...

Manage Your Student Loan Debt Better in 2015

Image via gettyimages It is usually seen that most of the students fail to manage their student loan debts efficiently after their graduation. The reason is quite simple. Most of the students spend their earnings on comfort and luxuries instead of repaying their student loan debt. It has become comparatively easy to acquire student loans. However, each one of us should keep in mind the fact that repaying loans are not easy as borrowing it. This is why there arises the need of a proper strateg y when it comes to managing your loans. It is desirable to formulate these strategies while you are still in college instead of waiting until you get a good job. If you are one of this kind, here are some easy tips for you to manage your student loan debt better:

Learn how real estate agents value properties for sale

How do you get into real estate sales? Every owner wants to sell his property for its maximum value. And all too often they end up choosing a real estate agent simply based on who gives them the highest initial valuation. However, this will be a costly mistake. How your home is valued. If you make a mistake in the estimate, it is possible that it will be sold for a price that is less than the real value of the property. On the other hand, even overpriced homes will discourage potential buyers from viewing your home. Also, high selling prices can even result in a long wait before a good deal comes in or does not sell at all. Therefore, titration is recommended as a suitable agent. Here are some things that real estate agents consider during property valuation . But, few factors real estate agents consider when valuing a property. 1. Local services:   During property valuation, one of the main factors that can drive the sale price up is the actual area where the home is located. Aspects