Forex trading education - What is Leverage?
What change the whole picture, and turns the Forex market into a market of opportunities to profit a lot of money in short span of time, is leverage.
Buy... of course, leverage causes trading to become more risky.
So what is leverage?
Brokers allow you to perform transactions in sums of money which are much larger than the amounts that you have in your account. Sometimes even up to 400 times more than what you have invested.
For example: You have deposited 1000 USD, the exchange rate of the Euro against the USD is 1.5520. And you believe that the price of the Euro is about to rise by 100 pips. That is your opinion.
You can pick up the phone and call the broker or give an order via the computer, 24 hours a day "please buy me 100,000 Euros"
Despite the fact that you have deposited 1000 USD and 100,000 Euros cost 152,000 USD, in this case, you have taken advantage of a leverage of 152 times the money which you have in your account.
In a transaction of 100,000 Euros, how much is each pip worth. we learned it already, remember?
10 USD. Let's assume that the exchange rate indeed rose to 1.5320, how many pips have you earned? 100. And how much money have you earned? 100x10 = 1000 USD.
Lets deduct the commission, and the net profit from the transaction will be 970 USD.
Nearly a 100% return in one day. How great!
But - what will happen if the exchange rate falls to 1.120?
You have lost 100 pips, you have lost all you 1000 USD.
Whats Next?
* Should you leverage?
Or go back to the education index
Buy... of course, leverage causes trading to become more risky.
So what is leverage?
Brokers allow you to perform transactions in sums of money which are much larger than the amounts that you have in your account. Sometimes even up to 400 times more than what you have invested.
For example: You have deposited 1000 USD, the exchange rate of the Euro against the USD is 1.5520. And you believe that the price of the Euro is about to rise by 100 pips. That is your opinion.
You can pick up the phone and call the broker or give an order via the computer, 24 hours a day "please buy me 100,000 Euros"
Despite the fact that you have deposited 1000 USD and 100,000 Euros cost 152,000 USD, in this case, you have taken advantage of a leverage of 152 times the money which you have in your account.
In a transaction of 100,000 Euros, how much is each pip worth. we learned it already, remember?
10 USD. Let's assume that the exchange rate indeed rose to 1.5320, how many pips have you earned? 100. And how much money have you earned? 100x10 = 1000 USD.
Lets deduct the commission, and the net profit from the transaction will be 970 USD.
Nearly a 100% return in one day. How great!
But - what will happen if the exchange rate falls to 1.120?
You have lost 100 pips, you have lost all you 1000 USD.
Whats Next?
* Should you leverage?
Or go back to the education index
