What is leverage in forex trading?
1:20 , 1:100
Does this effect the loss or profits?
What is good 1:1 , 1:500?
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This entry was posted on Saturday, May 15th, 2010 at 10:34 am and is filed under forex trading. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
May 15th, 2010 at 10:34 am
Leverage is just the amount of equity to debt you’re using. Basically, it leverages the amount of money you can control with the little bit of money you have. Your foreign exchange broker basically lends you a bunch of money so that you can control more sizable portions of currency, and this definitely affects losses and profits, because owning one unit of currency won’t make you any money as the fluctuations in currency valuation are to the ten-thousandth every day.
It’s a debate about what leverage is good. If you mess up with 1:1 leverage you may shoot yourself in the foot with a pistol. If you mess up with 1:500 leverage you’re going to blow your leg off with a shotgun. It just means you’re borrowing a LOT more money from the bank to control the lot of currency.
Leverage magnifies the amount of your investment per dollar you actually have. It magnifies any gains or losses.
I really like http://www.babypips.com/ for learning FOREX basics, and it should have more about leverage, including numerical examples if that pleases you.
May 15th, 2010 at 10:34 am
Leverage is the use of borrowed money to obtain an investment. In all cases, you stand to lose more than you have invested.
You are leveraged when you borrow money to buy a house or a car or a futures contract or forex. Most people don’t have enough money in their account to buy a house outright, so they put 10% down and borrow the rest. If things go bad, you can lose 10 times as much as you have invested, because you were leveraged 10:1.
In the stock market, you can trade at 2:1 leverage, which is considered very risky. You can buy twice as many shares as the money you have in your account. If you have a thousand dollars, you can borrow the rest on margin and purchase two thousand dollars worth of stock. Thus, in a one point move in the stock, you can make twice as much money than if you were not leveraged. Alternatively, if the stock goes down, you lose twice as fast. Stocks don’t go to zero overnight, but sometimes they get cut in half quickly. If the stock price declines by half, you lose your entire investment, because you were leveraged 2:1.
Now, if being leveraged 2:1 is considered risky, what do you call 200:1 leverage? Insane. Your account value is going to swing incredibly with only small moves in your investment.
May 15th, 2010 at 10:34 am
In forex leverage allows you to lose or profit more money based on your investment amount.
If you invested $1,000 in forex you really can’t make or lose much money because the market moves pennies on the dollar. However if you leverage that 1:100 your 1k just turned into 100k investment so you can make or lose money much much quicker. Investors typically leverage their trades however the smart investors are only trading 1 to 5 percent of their total investment capital to limit their risks.