Welcome again everyone,
hope you are all doing great.This is 6th consecutive article on the "Forex learning". I am starting to enjoy to write about this topic. Hope, you guys also find its interesting. For the people, who just got here today, this is my successive article on Forex learning. This one is the "Seventh/7th"one. Here the previous ones-
2.Learning Forex
3.Learning Forex
4.Learning Forex
5.Learning Forex
6.Learning Forex
Well, today I am going to discuss about one of the major topic related to your broker. leverage, What is it? How it works and the risks or opportunity related to it.
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In a formal way- Leverage is any technique that amplifies investor profits or losses. It's most commonly used to describe the use of borrowed money to magnify profit potential (financial leverage), but it can also describe the use of fixed assets to achieve the same goal (operating leverage).
You can also say, it will help you to pull something bigger than your original capacity.
In Forex-Your Forex broker will give you the maximum amount of leverage or margin loan on your capital.
Suppose your balance or capital is $ 100. If you use 1; 200 leverage, then when you trade, your broker will loan you up to 200 times the maximum. Now this is upto you,how much of your loan you will take. So, with $10 balance, 10x200 = $ 2000 dollar can be able to trade.
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Well ... if you have the opportunity to take a loan up to 200 times, why not you? When stock market do not want to give 1: 2 loan.
Suppose you deposit 10 dollars, decide to use leverage, 1: 1, do not take any loan. In that case, the broker will not let you open a big size trade. The big trade can be opened by those 10 dollars only is able by the $10 deposit, the same trade will open. In that case, if you move 50 pips in favor of the market, maybe your 1 dollar profit. Typically different currency pairs move 100-300 pips every day.
So you thought, take a loan and open a big trade, so that profits are high. If your broker offer 1: 200 leverage, you can open trade $ 2000 size with just $ 10. And so, that would have benefited 200 times more than what it used to be. Similarly, if you used to have 1: 200 leverage full, then it would be 200 times more likely to be Loss. If you had to hit 50 pips in the market before you would have earned $ 1, then now it will be worth 200 dollars.
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The broker loan will give you right. If you are profitable that is good, in Loss , if your loss is equal to your capital, then your trade will automatically close. If you do not have any capital remaining, the broker will not let your trade run in more than Loss or your balance. This is called Forex margin call, Forced sell is called in the normal stock market.
Brother, this is a terrible thing! If my loss is equal to the capital when I use more leverage, then what will be going on that fact, will I loss everything?
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In straight words, yes! So, no matter what leverage you have set, never open bigger trade in balance ratio when opening a trade. Some people say that, in forex, you can make two or three times a day of your capital. If luck is on your favor, it is possible. But in this way, trade with this much risk, you suffer or face the consequences one day. So, be careful about your doing.
Well this is all for today! I am not going to put any more in it. Let's talk about the later part in the next one. Feel free to leave a comment, if you have any queries. I will try my best to give you the desired answer.
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I will look into it.