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What Is Leverage in Forex? A Sin or the Essetial?

What Is Leverage in Forex? A Sin or the Essetial?
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Hey, it's John Foster and this time I am telling you about a very significant point at forex - leverage, disproving some novices' myths of this tool, describing its core and advising you how to choose the right one suiting your trade style. Okay, what it leverage in forex?

Leverage is the ratio of your personal funds at the broker's deposit to those which you can use to buy currency. For instance, leverage 1:100 means one your dollar stands for 100 brokers'. In there are 500 $ on the deposit, you can buy currency for good 10,000 $.

Contents:

1.What Is Leverage in Forex? The Evil or Need?
2.Stupid Beginners' Questions or Myths About Leverage!
3.Which Leverage to Choose?
4.How to Insure Risks?
5.Money-Management! Save Your Money!
6.Finishing

 

 What Is Leverage in Forex? The Evil or Need?

Most old-school traders state the leverage harms forex and makes people take bigger risks. I don't agree with it, as it is leverage what lets a trader gain at forex. Without it, you could not get profits from insignificant charts fluctuations, and they are often not that noticeable and worthwhile.

Here's the simple example. Russian ruble has lost more than 50% value in USD/RUB ratio in economical crisis of Russia. Thus, if one has bought dollars in the beginning and sold them now, their deposit would be doubled. And a trader's profits would have been 100% profits for several months, considering that crises like this rarely occur and are very tough to be predicted. So, you can earn in this way once a life.

At the same time, a skilful trader, working daily with the leverage of 1:100, can double their deposit for 1 month, always trading with such profitability. And keep in mind that this trader works with EUR/USD quotation which is supposed to be relatively stable - the rate changes very slightly in macroeconomical scales. Roughly, if today 1 euro costs 1.2 $, with strong and noticeable chart movements, it will cost 1.3 $ in approximately three months. It's possible to earn with such slight fluctuations, but only if you have solid deposits. And though, your profits will be nothing in comparison with risks and investments. Using leverage, one can effortlessly gain from even a slight movement of jump or fall, which appear every day. With leverage, you can earn with an order of several hours, and if you open a week-order from the right signal, you will be able to get up to 100% of the original deposit. For that, traders love forex, as they can do what stock exchange traders or classical speculators can only dream of.

But don't forget that leverage cuts both ways, and it can bring not only good profits, but also some risks. Don't fear them much - there are some ways to minimize them - you will learn about them further.what-is-leverage-in-forex-3

Stupid Beginners' Questions or Myths About Leverage!

Awkward rumors and myths about leverage are popular among beginners who only start acquainting with forex. Here are most interesting ones:

MYTH 1. Trading with leverage, you can get into debts for brokers!

Disproval: Leverage has nothing in common with traditional loans, and even if you lose much, you will lose only those funds you've deployed at the deposit. Never more. Though, you'd better lose nothing, for that - just study any desired trading strategy on our website.

MYTH 2. You must pay interest!

Disproval: You mustn't pay any interest to brokers, at least, for using leverage. You pay some fees only for opening new orders - so called "spread", but it's very little and doesn't depend on leverage but on the amount of the order cost.

MYTH 3. You can earn 1,000,000 $ starting with 1 $ with leverage!

Disproval: From one point of view, financial exchange can be called a miracle, as ordinary people may become wealthy with them, but everything has its limit, doesn't it? Bigger profits require more investments, and never a one leverage will let you make a million from several bucks. For good income, you must have at least 250 $, better - 500 $ and more in your disposal. Don't forget that leverage is the opportunity to trade with more funds than you really have, but the bigger is your deposit, the more is the amount can be used for buying and further, making money.

Which Leverage to Choose?

There's no right answer. There are many types of leverages, and many types of traders. Some pros say that one shouldn't use leverages more than 1:3 or 1:10, but they forget novices don't have even a hundred for trading, and they need more for future working. Here's the list of most common leverages and traders' characters for each of them:what-is-leverage-in-forex-2

  • 1:3 leverage suits old-school traders, working with interchange stations some time ago. To make money with that, one needs solid investment from 10,000 $ and even more. With less investments you are not likely to gain much.
  • 1:10 leverage is great for long-term trading with high-volatility currency pairs (which change in prices very fast), USD/RUB, for example. 500 $ is the minimum deposit with such leverage.
  • 1:100 leverage is fine for modern young traders, who want to engage daily trading or medium-term trading with traditional currency pairs, such as EUR/USD or GBP/USD. Leverage won't let you lose much in case of making mistakes, but also will allow to make solid money. I recommend starting with 250 $ and more.
  • 1:500 leverage is for pro-traders or extremely-tempered novices, who look forward to gain more than 100% profits per month and can deal with risks. You'd better start with 250 $ and more with such leverage.
  • 1:1000 and bigger leverages are good for sophisticated lovers of exchange extreme trading, who like to go all-in and earn more than 300% per month. Don't count on any stability, but wait for emotional outbursts and opportunities to get wealthy for several hours. You can start with 200 $. And use only that money you can afford to lose.

How to Insure Risks?

Leverage increases your risks, but they can also be insured, if you set StopLosses and TakeProfits correctly. Having done everything well, following your strategy or standards, the risk of losing more than 5% of your deposits goes flat-out. You can get experienced in using these tools in the article "StopLoss and TakeProfit: What Are They?". There, you will study the Safe rule, which makes your trading amost risk-free.

Money-Management! Save Your Money!

Forex pros recommend use so-called money-management. This science contains the one rule - don't work with more than 5% of your deposit, considering leverage as well. Using this simple rules, you won't be able to waste all your money. But how to calculate allocated funds?

Open the order in so-called trading lots. 1 lot is equal to 100,000 $ at forex. You may enter the market with 0.1 lot (10,000 $), or 0.01 lot (1,000 $). Take these numbers into account when choose the amount of the order.

For instance, you have 500 $ on the deposit. Let's calculate, what is the maximum amount of all orders, meeting all money-management laws. To do this, estimate the leverage. Let's assume we trade with 1:100 leverage. Then, we have the following: 5% of the deposit is 25 $, considering leverage, we have 25*100 = 2500 $. So, we can enter the market with just 0.025 lot. However, money-management rules can sometimes be violated, if you see a good signal of your trading strategy, but don't run too far with it. If you didn't get the algorithm of calculation, use this formula:

Maximum Lot = Deposit*0.05*leverage/100,000

Finishing

So, you now know what leverage in forex is. It is the tool making trading profitable and letting gain with minor investments. But along with these advantages, it creates extra risks, that should be insured with StopLosses, the Safe rule and money-management. Having done everything right, all risks will go flat-out.

Get lucky and gain much!

Best Regards, John Foster.

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