Latest news about Bitcoin and all cryptocurrencies. Your daily crypto news habit.
In Forex and stock trading, we often hear the word «Leverage».
When trading these two instruments, we can choose to use leverage. So what do you know about leverage? Finex will peel it off for you.
Smart trading with educational information from Finex.
Definition and How to Calculate Leverage for Forex Trading
Leverage in Forex is what lifts your trading power above your actual funds capacity, or it can be interpreted as the practice of using borrowed funds to increase your trading position beyond your account balance.
Traders who like to take big risks certainly like high leverage. Why? Because the potential for high profits. Of course you remember the philosophy of 'high risk, high return'.
Coincidentally Forex trading often offers high leverage. However, this is also why we must be careful. Because managing large amounts of money is not easy, maybe we have never managed such large amounts before.
To calculate leverage, you simply divide the total nominal of your open positions by your trading capital, or, the formula is like this:
Leverage = Total Transaction Value / Total Trading Capital
Case in point, suppose you have $10,000 in your account, and you open a $100,000 position (which is equivalent to one standard lot), you will be trading with 10 times leverage on your account (100,000/10,000). If you trade two standard lots, which are worth $200,000 in nominal $10,000 in your account, then your leverage is 20 times (200,000/10,000).
Effect of Leverage on Profit on Forex Trading
In Forex market, many brokers offer leverage as high as 1: 100. This means that for every $1,000 in your account, you can trade up to $100,000 worth.
As traders, we monitor currency movements in pips, which are the smallest unit of currency price and depend on the currency pair. It's only a fraction of a penny. When a currency pair such as GBP/USD moves 200 pips from 1.9400 to 1.9600, that means the move is 2 cents of the exchange rate.
This is why Forex transactions must be carried out in fairly large amounts, which allows these price movements to translate into higher profits when magnified through the use of leverage. When you are dealing with an amount like $100,000, small changes in currency prices can result in significant gains or losses. Finex itself offers leverage of up to 1:500 for those of you who use a Mini account.
Leverage settings are very flexible and can be adjusted according to your needs. Leverage you can use to increase your profits, but you can also lose because of it. Remember that the greater your leverage amount, the higher the risk you will take. On the other hand, a small leverage will protect your capital when you make a mistake.
In simple terms, leverage opens you the opportunity for larger orders, but you should not forget trading fundamentals (process planning, orders, position management). As with other types of loans, at some point we have to settle the responsibility of leverage to the broker you choose. Pay attention to how much you can borrow and when you have to pay it back.
Be careful using leverage is one of the trading recipes for the long term. How smart we are in trading is often determined by how much experience we have, which will also determine how wise we are. It is also the learning process that will train us in applying risk management to the transactions that we do.
Equally important, equip yourself with insights about trading, the latest information, as well as the types of methods and strategies. Finex provides education about trading as well as comprehensive information that you can use to increase your income. You just need to follow us.
Trading Forex, only on Finex.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.