What is leverage? This question is often asked. In order to clearly understand what this concept is, it is worth familiarizing yourself with its basic properties and definitions:
1. Leverage is cash equivalent to a currency in an open account and provided on credit by a broker.
2. The digital expression of leverage indicates the ratio of the amount on a personal deposit to borrowed funds.
3. The meaning of this concept lies in the possibility of making a profit in a larger volume. And the broker provides such an opportunity.
4. Leverage is written in two digits. The first one is always equal to one, and the second one indicates how many times the loan exceeds the initial deposit.
5. Loan calculation, profit calculation, registration is carried out by the broker in the automatic mode separately for each transaction when buying or selling a trading asset selected by a trader.
6. Payment for the use of leverage is not provided, there are also no interest and credit commissions.
7. If the transaction is unsuccessful, then the loan funds will not be lost.
Benefits that arise when using leverage
What is leverage will become clear from this article. Consider its features.
1. This type of loan does not require payment of any interest for using it.
2. The use of leverage when making a transaction provides the trader with the opportunity to increase his profitability several times. The calculation of the trader’s profitability is based on the concept of leverage.
3. If the transaction is unprofitable, the trader does not lose borrowed funds, that is, they will not have to be returned.
Rules to follow
1. It must always be remembered that if a leverage of a high or medium value is used, then it is easy to lose funds, however, as well as to earn.
2. At the time of the transaction, the trader needs to calculate its optimal volume. This should be done because increased market volatility can destroy the entire deposit.
3. Experts do not recommend using the available margin in full.
4. You can increase leverage if the trader is confident in himself and makes transactions that bring profit for a long time. In this case, the size of the deposit should be commensurate with the volume of transactions.
What is leverage will be easier to understand by the example of trading activities.
1. A trader opens an account and chooses a leverage of 1/100.
2. Tops up your own account with 10 thousand dollars.
3. Opens a deal in the amount of 1 lot in relation to the currency pair dollar - euro.
4. In this case, one lot will correspond to 100 thousand units in the base currency or 100 thousand dollars, in our situation - the euro.
5. Given the real currency quotes, the trader sees that 100 thousand dollars will cost him 135 thousand dollars.
6. Leverage allows a trader to buy 100 thousand dollars for only 1350 dollars. In this case, all other funds will be provided by the broker on credit, they will participate in the transaction in the event that an order drawdown occurs.
7. In order to avoid losses, the trader is not recommended to use more than 10-15% of their own deposit, which in this case amounts to $ 1,350.
Let’s figure out which leverage to choose.
What types of leverage are there?
Brokers provide several types:
• 1/1;
• 1/10;
• 1/20;
• 1/50;
• 1/100;
• 1/500;
• 1/1000.
Brokers rarely provide the latter type.This is due to the fact that transactions using such leverage are very risky.
Leverage
When choosing a leverage, one should take into account some nuances:
• You won’t be able to earn much if you work with very little leverage.
• Trading will be risky if you use too much leverage. Even the smallest change in quotes can bring not only great profits, but also huge losses.
Fundamental rules
Given these nuances, you should be guided by several rules when choosing leverage. Moreover, for each type of trading account, you can use a separate leverage.
• If the account is cent, then you can select the maximum amount of leverage.
• If the account is dollar, then it is advisable to focus on the average value of leverage.
• For the account on which the large deposit is located, as a rule, the leverage with the smallest value is chosen. The profit on such accounts is governed by the volume of the transaction. The small leverage will allow the trader to protect themselves from large fluctuations in exchange rates.
• Different brokers can provide leverage on a variety of conditions, which are mandatory reflected in the offer agreement.
The best option is to trade using 1/100 leverage. It is this size that allows the trader to get a confident profit and not risk his own money. Consider the term "leverage on the" Forex ". What does this mean?
What effect does the shoulder have on the results?
When making a transaction on the market, a trader can not only make a profit, but also incur losses.
To calculate the profitability of a transaction, you need to know the following;
1. Each lot of "Forex" corresponds to one hundred thousand currency units, which are located in the name of the currency pair in the first place. In each instrument, this currency is the base currency.
2. If trading in smaller lots is carried out, then the calculation should be made taking into account the lottery description. If the transaction has a volume of 0.1, then the calculation will use units of the base currency in the amount of 10 thousand units, if the volume of the transaction is 0.01, then only a thousand units.
3. The cost of one point can be found by multiplying the step value of the quote by the volume of the transaction.
4. To calculate the total profit or loss, you need to multiply the number of points passed by the value of one point.
How to control the impact on the level of risk of the leverage of the broker?
In financial markets, risk rules are subject to certain axioms:
1. The risks in trading are absolutely not affected by the size of the selected leverage.
2. The larger the amount of leverage, the smaller the portion of personal funds on deposit is used in the value of the pledge at the time of opening the transaction.
3. If a trader makes many transactions simultaneously on different assets, it is recommended to choose a larger leverage. Thus, the pledged amount is used small, and the trader can use it all in several transactions.
4. If a trader uses a strategy involving a sufficiently large drawdown, it is also recommended to use a large leverage.
5. If a trader uses large amounts of deposits and prefers to conduct no more than one or two transactions at the same time, and the trading system does not provide for a large drawdown, it is recommended to use a small leverage. Which leverage is better? The trader must decide for himself.
Margin and Leverage
In order to open a position and then hold it, the broker may require a certain amount of collateral value to ensure its own security. When a transaction is opened, the amount corresponding to such a deposit is automatically booked on the trader’s deposit. Its size is independently calculated by the broker.
This collateral value is called “margin”. The margin will be reflected, if the transaction is open, in a separate window of the trading terminal with which you are working. This window is called “trade”, in addition to margin, it reflects information on all calculations and indicators of the transaction.
The margin will be used to cover potential losses if the market scenario does not develop as expected by the trader. For example, if one lot costs 10 thousand dollars, and the leverage is used in the amount of 1/100, then when opening a transaction, you will have to pay 100 dollars as collateral value. That is, the second digit in the expression of leverage reflects the amount of collateral that will need to be paid when operating with one lot.
The basic principles of margin trading
This type of trade, as margin trading, involves trading on borrowed funds.
If a trader decides to open a transaction, the volume of which exceeds the amount of funds on his deposit, then immediately upon opening the transaction he will be provided with the necessary amount in the loan.
For margin trading to be successful, you should adhere to the following requirements:
1. You will need to create your own trading system.
2. Test the trading system on a separate account for demonstration. Experienced traders claim that hundreds of successful transactions will be enough to confirm the worthiness of the working system.
3. Following your own strategy and using statistics, you should calculate potential losses if the scenario suddenly develops unpredictably. At the same time, settlements are carried out not in deposit currency, but in points.
4. Using the number of points and the size of the deposit, calculate the stop loss. The potential loss should not be more than five percent of the total amount on deposit.
5. Take into account the selected leverage and calculate the volume of the transaction that will be most effective.
How to change leverage?
The ability to change the leverage is laid down in the standard MetTrider functionality, on the corresponding tab.
However, if you could not find the desired tab in your own terminal, then there is another way to change the leverage. You can do this using your personal account registered on your broker's website.
Before making such changes, you should make sure that at the time of the change all positions are closed. Otherwise, changing the leverage will fail. Information on changing leverage in your account is located on the same tab as user trading accounts.
We examined what leverage is, now this concept will not surprise you.