Forex Leverage
As more automated forex robots are released on to the market we are seeing people who are not familiar with trading looking at buying them as a way to earn passive income.
The theory behind this is anyone can download the software and simply check for their profits. Yes I agree that this can happen however you will not always make the profits that are advertised.
There are several basic concepts you must understand :
• What is a margin?
•How much leverage you should have and what it actually means.
Margins: Your margin is the amount you place with the broker in your account (Your capital).
Leverage: You will have seen Brokers offering leverage shown as 100:1, 200:1, 400: 1.
The terminology is a little misleading, it really means the Maximum Amount arranged between you and your Broker that they will lend against your capital (margin).
Using 100:1 as an example this simply means that if YOU WANT to you can make a trade to the value of 100 times your capital, with 200:1 a trade worth 200 times your capital etc. But you don’t have to.
“True Leverage is what you decide to use for each trade not what the brokers offer”
Example: Capital $10,000.00 Leveraged 100:1 means you only need 1% of transaction cost.
If you take advantage of the broker’s offer you can trade up to ten Standard Lots ( $ 100,000.00 x 10) .
$100,000 is a full LOT and normally the value of 1 pip is around USD$10.00, depending on the currency pairing. (I will go into more detail on currency values in another article.)
To calculate your real leverage when trading one full Lot, you divide your transaction total ($100,000) by your margin (capital) $10,000 and the answer is 10. That is your leverage for that transaction. It does not relate to the 100:1 you can borrow from the broker.
Your margin can be $10,000.00 and you have an account with a broker using 200:1 Leverage. You can still trade in mini lots only, $10,000.00 then if you divide transaction value by capital ($10,000 by $10,000) the answer is 1:1 That is your leverage for that trade.
How much leverage you apply is YOUR decision.
If you start with less capital you can trade with mini lots and the value of a pip goes from $10.00 value to $1 per mini Lot ($10,000) or 0.10c in a micro lot ($1000).
Brokers realized that they can offer very high leverage as this will draw investors from other markets, but as traders you do not have to use it. “.
Main Points:
• What is usually referred to as leverage is actually the margin required expressed as a ratio if you use all the borrowing power the broker will allow.
• Real leverage is determined by dividing your capital into the value of your transactions
• Real leverage can differ from trade to trade and increases with multiple simultaneous trades.
Using The high borrowing ratio 400:1 can be tempting, however normally the losses will wipe out your capital very quickly…..and we all have losses.
About the Author:
Lyndsay is a successful entrepreneur and forex trader. Discover how you can get the best proven Automated Forex Trading System and start trading successfully today. For the #1 automated forex system available check out http://www.best-fx-trading.com/
Article Source: ArticlesBase.com – Forex Leverage Tips When Using Forex Robots
96. How to Calculate Leverage in the Forex Market
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