Leverage is the ratio of your deposit to the lot you work with. In other words, those having a deposit of $ 100 can make a deal with a lot of 10,000 - in this case the leverage will be 1 to 100. If you set the lot to 5,000, then the leverage will be 1 to 50, etc. The maximum leverage is considered to be 1 to 200.
Leverage is, in essence, borrowing capital in order to increase investment income. In the Forex market, a broker can “lend” capital to a trader, which allows the latter to open much larger positions, as if he had a bigger lump of money on the trading account. However, this also means that the trader will incur losses in the same proportion, as if his capital were much larger.
Let's look at a simple example. You are a novice investor and decided that you can not spend on operations with assets in the stock market more than $ 1000. But suddenly you find a good strategy and for a deal with a portfolio of securities you need $ 20,000. You borrow the missing money from your broker – you get a leverage of 1:20. Of course, the broker is simply obliged to protect his money, and in the automated trading system he sets a threshold for loss on the transaction, equal to the amount of your account - $ 1000.
Leverage is set automatically depending on which lot you will work with.
FAQs about leverage
From time to time, the following questions arise from clients: “How so! Everyone says that leverage 1: 200 is very risky! Why does a broker plunge customers into losses offering this kind of leverage? Some brokers have a maximum offer of 1:20".
- Leverage in general is the ratio of the traded volume to the amount of the trader’s own funds.
- Maximum leverage is the maximum ratio. It is indicated in the advertising information, with the assumption that all traders understand what is being said. It is on this striking example that we often show at seminars what the maximum possible income of a trader is when prices rise by 100 points. Brokers can afford such operations, because their losses are limited by the value of the balance of the trader’s trading account. As soon as the loss reaches the amount of money in the trader’s account, the broker will close all of his current positions. This will not allow the trader to lose more money than he has on the account, and he will not owe the money to the broker.
- And leverage in a particular situation is precisely the ratio of the current actually selected transaction volume to the current volume of the trader’s own funds. In a specific situation, the client chooses his shoulder from 1: 1 to 1: 200! The only restriction for it is the maximum shoulder.
A leverage of 1: 200 is when a maximum lot of 200,000 is bought at a deposit of $ 1,000. But this is a RISK! That is why the experts in stock funds recommend trading in such a way that the risk is no more than 5% of the capital - this is equivalent not only to reducing the stop, but sometimes to reducing the leverage to the minimum values (the transaction volume decreases, the price of the item - and with it the possible loss) . On the other hand, if the system has a good chance of making a profitable trade, it is possible to increase the traded lots, that is, to use a higher leverage (for example, some forex experts assume that within a day, under certain conditions, you can trade a lot of 1 / 4-1 / 3 from the maximum, using the shoulder 1: 25-1: 30).
It is wrong to assume that with the declared leverage of 1: 200 it is impossible to trade with a leverage of 1:50. Buying at a deposit of 1.000 a contract of 50.000, the trader uses the credit. And this loan leads to the fact that the volume of the transaction is 50 times greater than the size of the deposit. Leverage in this particular situation becomes 1:50.
Leverage is when there is a loan.
If, having 10.000 on the account, the trader buys a mini-contract of 10,000, then only in this case he will trade without leverage (1: 1).
If the client, having 100.000, will trade in the contract in the size of 10.000, 50.000 or 100.000, it turns out that the trade is conducted with its own funds without using any leverage at all.
Total, with a deposit of 1.000, the leverage corresponds to a specific contract as follows:
- 10,000 transaction - 1:10 leverage (1,000: 10,000)
- 20,000 - 1:20
- 30,000 - 1:30
- 50,000 - 1:50
- 80.000 - 1:80
- 200.000 - 1: 200
Our customer service system allows the customer to choose a leverage from 1: 1 to 1: 200. And this is done automatically when the customer chooses the transaction volume.
- Capital increase for the transaction - you can make profitable and promising transactions at the right time, without even having the necessary funds for it.
- No commission for the use of borrowed funds - the broker will not take a ruble of your profit, you will only pay it with its amount or, in case of losses, cover the loss.
- A trader can enter capital-intensive markets without even owning large own funds.
- There is a technical opportunity to trade in plus on lower asset prices.
- The risk of losing the deposit and the funds in the account due to the increase of the loss due to the increase in the amount of the transaction. But this does not mean that the more financial leverage, the higher the risk! The risk depends only on the characteristics of the transaction: the quality of the asset, the market situation and the trading strategy of the trader. Again, using stop loss, you can minimize this risk.
Author: Kate Solano, Forex-Ratings.com