All about the leverage on FOREX
I see that many people do not understand
what the leverage on the forex market
is. Also, among beginners there is a myth that the more the level of
the shoulder - the higher the risk. Let's try to figure out if
For starters, let's clarify what exactly
is this is the most leverage. Leverage can be of different
sizes: 1:20, 1:50, 1:100, 1:200, 1:400 or 1:500. Some very dubious firms even offer a level of 1:1000. Leverage allows you to trade more money than you have in the
account, taking them on loan from the broker. This can help increase your profits (or losses when the price goes
against your position).
Consider the following example. John has a brokerage account size of 5000$ and decides to sell a
whole lot USDJPY. Trading one lot, John actually
uses to trade 100,000$. If he uses a leverage of 1:100,
then the pledge of 1,000$ taken from his account, and 99,000$ provides broker. Results one hundredth of the required amount from the account is John. This is the power of leverage of 1:100.
And how did the broker protects himself
against possible loss of money? Very simply, the potential loss
is capped by John on his account. Let us assume that the position
opened by John causes damage and the price continues to go against him.
After reaching the level of non-private
loss, say, 4,000$, (of John on the account of 5000$), the broker can call John and
ask them to add money to the account or close part of a losing position. This is called the “Margin Call” (sometimes called Stop Out). That is, the term "margin call" literally means a call about problems with the mortgage. In our computer age, certainly no one is calling customers, and
the position, the level at which the mortgage broker diminish the established
level, closes automatically, without notice to the client.
When a Margin Call?
In the case of John, to open a position is
taken from his account of 1,000$ bail. Let's assume that the market
goes against the position of John (which originally cost 100,000$) and
unclassified (floating) loss reaches 4,000$.
Thus, the funds (equity) account John is now equal:
5000-4000 = 1000$. When the funds in the account are equal to
or less than required to maintain the position of the pledge, is Margin Call. Different brokers and on different types of accounts the level of
margin call is different, but usually it is 20-50% of the required collateral. That is, when the funds in the account
are reduced to, say 30% (the level may be different for different types of
accounts) of the required collateral, there is an automatic closing of
positions a trader.
For example, John worked on the account
Margin Call. In this case, when the position is closed (eg with a loss of 4500$),
its value is: 1,000$ (initial pledge from the account of John) 99,000$ (added
to the broker as a loan) -4500 $ (loss) = 95,500$.
A broker will take all this money, plus
pick up the missing 3500$ to 99,000$ back that he lent the trader. Thus, the entire loss on the position rests entirely on the
account of John, which, after the operation margin call is only 500$. Similarly,
if the position is in profit, then the entire profit gets John, after the close
For example, John the broker borrows 99,000$
and 1,000$ deposit is taken from his account, this position makes a profit of 8000$. And, when the position is closed, John is 99 000$ 1000$ 8000$ = 108,000$.
By closing the position, will be refunded 99,000$ to the broker 1,000$ bail to
return to the account of John and a profit of 8000$ and goes to his account.
This is leverage - a double-edged sword
that can turn a small deposit into a pile of money, or kill your score in the
blink of an eye
We now turn to the myth about the dangers
of high leverage.
There are two accounts: one with a
leverage of 1:100, and the other with a shoulder 1:500. On both accounts we opened at the same position, say buying a lot EURUSD
0.01. Question: on which account a greater risk? Answer: The risk of the same. Let's say we have lost 100 points,
that the lot would be 10 $ 0.01, unless the amount of loss will increase or
decrease the level of leverage?
Actually, a lot of leverage allows you to
open large positions in the presence of small funds in the account. No more. If you use an adequate level of
risk, exercising reasonable control of the capital, then at least you have a leverage of 1:100, 1:500 though - it changes nothing.
But if you want to play roulette at the expense of
installing some martingale-Adviser, or opening up huge lots, then yes - a lot
of leverage allows you to extend a little fun before the margin call.
To summarize - the amount
of leverage does not affect the level of risk in trading. At the level of risk
affects the size of the positions offered by the trader, and nothing more.