It is essential for every newcomer
to master the basic Forex market terminology in order to start profitable
trading activity. Without this information, a trader won't be able to have a
clear understanding of everything that is happening on the platform, therefore
no rational and measured decisions can be made.
Most newcomers are likely interested
in finding out what Forex leverage is. It is impossible to open an account with
any broker unless this indicator is selected. On the other hand, random
parameter selection is the worst thing you can do. So, it's better to invest
your time and deepen your understanding of the Forex terminology.
So, let's figure out what the Forex
leverage is and what impact it has. Actually, the answer is quite simple. It derives
from the notion. Leverage is a credit ratio that varies over a wide range of
values. In fact, it allows all market participants to sell and buy much more
than they can afford.
Let's take the following example to understand
this issue more deeply:
For example, you
register with a broker and choose to trade with a leverage of 1:100. You have
only $100 on your deposit. But the selected leverage will allow to make
transactions for the amount up to 10 thousand dollars. Within the limits of
this amount, a trader can open transactions and generate profit. To secure proper
funds, a broker sets a loss threshold equal to the amount of the trader's
account.
As soon as the
transaction is closed, the deposit amount (all on the trader’s deposit) remains
in the player's account plus the profit earned. In case the transaction was
unprofitable, a trader would lose only the amount available on his account.
This raises a quite reasonable question: "What is the Forex leverage for the broker and what benefits does he get from it"? Keep in mind that a broker's profit depends on the funds turnover. The more investments involved, the higher the earnings of the broker.
Upon clearing the issue of what Forex leverage
is, its advantages become obvious:
However, the leverage has several
notable drawbacks. Namely, there is always a risk of losing all the money in
the account if the trend changes and the transaction turns out to be
unsuccessful.
At the same time, you should keep in
mind that such Forex leverage, as 1:100 or 1:600 can have the same risks, since
it all depends on the characteristics of the transaction itself:
Note that not every transaction on the
financial market can be realized with borrowed money.
Upon deepening their understanding of Forex leverage, newcomers are emotionally excited, hoping that several transactions for borrowed money will generate enormous capital. That's their mistake, which leads to a loss of funds on the deposit.
Under no circumstances a newcomer
should break his head, using the leverage of 1:500 for all 150 dollars and
entering the market disorderly. Start with small borrowings, improve your
strategies, deepen your knowledge.
If these rules are strictly
followed, the risk of losing everything will be reduced to a minimum:
Despite the risks, there is no need
to refuse the use of leverage. Benefit reasonably, be guided by common sense
and do not stop learning more about the Forex market.