Knowing how much to risk per trade is important in forex career. Managing risk is a very important concept to understand in this business . So, to make money with money you have to understand the logic of leverage. Where it can be in our favor, and when and where it is not in our favor to use high leverage for trading.

Scalpers are traders who like to close trades for 2, 5, 10, 20, 30, 50pips they are usually using high risk or medium risks, as they use tight stops for their scalp trades. The long term traders however use lower risk, who don't have time to site in front of pc 24/7, they are known as investors who like using long time frames h4-daily-weekly. Short term investors or scalpers and intraday traders like to refer small time frames like 30min, 1hour and h4.

So, now let's understand now what leverage is?


Leverage is investing with borrowed money as a way to amplify potential gains (at the risk of greater losses).
Many brokers offer investors 1:100 leverage for foreign exchange trading or forex trading. What does that mean, it means if you invest 100$, you'll have the ability to use 100$x100times leverage=10000$ borrowed capital for amplifying your gains. This money is provided by the brokers, for exchanging in markets to make higher gains or losses.

As in Currency markets when 1cent change occurs, than on a 100$ investment you would not make much gains, but on 10000$ investment with leverage, a 1 cent change for example in Euro occurs from 1.1200-1.1300, let's say you bought it around 1.1200 and now sold 10000$ @ 1.1300 to some other buyer who is willing to purchase it at a higher price, depending on your leverage, if it is 1:100, you should get a return back of 10000$ . Question is how does that happen? Let me explain:

For example if you have 10000€ in a saving account, and 1cent increases, you go to a money changer and tell him, "Sir I would like to sell 10000€ for Dollars", he will first offer you a quoting price per base currency Euro, which is quoted from the live exchange market. Which will have a bid and ask price, so your money changer will offer you a bid price, as you are the seller. And he is buyer of Euro. Now let's do some math

Exchange rate of euro is: 1.1356$ for 1€


So, your profit in USD would be 1356$ on 10000Euro exchange in reality

But in Spot fx trading, where brokers offer you leverage (extra borrowed capital free of cost) to make larger returns and losses, it is a bit different business, here you get the advantage of leverage . So, you must understand the concept of leverage.

Now if your broker offered you 1:100 leverage for example on EUR/USD exchange with 10000$ now let's calculate the net profits with respect to 1cent change in EUR/USD. Let's suppose you buy the Euro @ 1.1200 with 1:100 leverage, and sell Euros @ 1.1300. Price basically moved 1 cent in your favor, so your returns now would equal to:

10000$+10000$ (return/profit)=20000$

Extra 10000$ comes with extra leverage 1:100 . As broker will provide you 10000$x100=1000000$ or 1mil for exchanging in market for 1cent change . 1cent change in fx market is equal to 100pips. The return on 1000000$ on 1 cent change will be higher, which will give a 100% return on a 10000$ investment. But where there is a chance of making gains, there is also a chance of making losses. So, this is the part where you'll think trading is like gambling, but the answer is it's not exactly like gambling. Because you have the ability of risk management, which if used properly could allow you to build returns like big investment banks, firms and institutions .

Let's see some margin examples or risk amount used for trading here on dukascopy:

10$ margin requirement
1000unit trade: 1$ in 10pips, (take profit/stop loss)
1000unit trade: 10$ in 100pips (take profit/stop loss)
1000unit trade: 50$ in 500pips (take profit/stop loss)

20$ margin requirement
2000units trade: 2$ in 10pips (take profit/stop loss)
2000units trade: 20$ in 100pips (take profit/stop loss)
2000units trade: 100$ in 500pips (take profit/stop loss)

50$ margin requirement
5000units trade: 5$ in 10pips (take profit/stop loss)
5000units trade: 50$ in 100pips (take profit/stop loss)
5000units trade: 250$ in 500pips (take profit/stop loss)

100$ margin requirement
10000unit trade: 10$ in 10pips (take profit/stop loss)
10000unit trade: 100$ in 100pips (take profit/stop loss)
10000unit trade: 500$ in 500pips (take profit/stop loss)

200$ margin requirement
20000unit (0.02mil)trade: 20$ in 10pips (take profit/stop loss)
20000unit (0.02mil)trade: 200$ in 100pips (take profit/stop loss)
20000unit (0.02mil)trade: 1000$ in 500pips (take profit/stop loss)

500$ margin requirement
50000unit (0.05mil) trade: 50$ in 10pips (take profit/stop loss)
50000unit (0.05mil) trade: 500$ in 100pips (take profit/stop loss)
50000unit (0.05mil) trade: 2500$ in 500pips

1000$ margin requirement
100000unit (0.1mil) trade: 100$ in 10pip (take profit/stop loss)
100000unit (0.1mil) trade: 1000$ in 100pips (take profit/stop loss)
100000unit (0.1mil) trade: 5000$ in 500pips (take profit/stop loss)

5000$ margin requirement
500000unit (0.5mil) trade: 500$ in 10pip (take profit/stop loss)
500000unit (0.5mil) trade (0.5mil): 5000$ in 100pip (take profit/stop loss)
500000unit (0.5mil) trade (0.5mil): 25000$ in 500pip (take profit/stop loss)

So, now we now our basic assessment of the leverage system, let's move on how to know our leverage for a short term trade and long term trades.

Scalpers trade basically based on technical indicators, technical patterns, or they might be placing trades in hope of good or bad fundamental news (during which momentum is higher during high impact economic news releases from U.S, CAD, GBP, EUR economies) The scalpers will enter market for 20, 30 pips. So there stops would be between 20,30, max 50pips (high risk trades) according to their entries. Usually scalpers use high leverage for their small trades for quick returns in small time frame like 1hour-4hour max. Short term trades basically use 100%, 50%, 25% leverage for their trades. Whereas Long term traders have larger stop loss upto 500pips and target 500pip take profits.

So, long term traders are basically looking for making more pips with lower risk, so their objective is not entirely going to be based on fundamentals, but will be based on a long term technical investment strategy, which will require some time for investment to grow. The time of these investments could be 30days, or 4-6weeks. That's basically a long trade. These traders are more patient, and less concerned on the result of the release of some fundamental data, there objective is based on a long term view of the charts with respect to some technical pattern which support the probability of growth of the investment.

Long term traders like using trailing stop, which allows investments to grow with larger amount of pips. The idea of trailing stop, is good for a long term trader, as he will be able to remain in the market for longer time, and can lock some initial profits with his/her stop loss, which can be used in traders favor as well . But will require a little experience on setting the trailing stop at such a place which could act like an insurance plan, so that if due to some bad economic data, you would be able to get some returns instead of loss. Long term investors don't risk basically more than 10% of their account on a long term trade. For beginner long term investor it's recommended to use 1%-2% of account equity, but for advanced traders it is max 5%-10% of account equity.
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