Forex is the new way of trading these days. So many people are trying this new type of trading in order to stay up to date and invest more. But some of the forex trader beginners are usually confused about some of the terms in the process. One of the most confusing terms in forex trading is called leverage. So many people are having a hard time in figuring out what is leverage. So if you are one of them, you should read this article. Here are all the things that you need to know and learn about forex leverage.
Forex leverage defined
So what is actually a leverage in forex? Leverage is sometimes also known as margin in forex trading. Essentially, leverage means that you are using a small deposit for a larger exposure in the forex market. So, you will be able to gain a greater amount of money when the market is in your favor. You can do so while making a small amount of deposit. On the other site, you must also be careful about the negative impact. Whilst you will have the greater return of money, you will also get a greater loss when the market is moving against your trading. If you love taking the risk, leverage is a good way of doing a forex trading. You will certainly have to worry about the risk of losing more money but also the promise of more wealth.
The System of Leverage
Leverage is usually conducted with the system of ratio. The ratio itself usually has already been set by your trader in order to conduct the trade. For instance, most people will use the 50:1 ratio for a 2% margin. So what does a 50:1 ratio means? It means that you can have the opportunity to gain fifty dollars per one dollar that you own in your account. But then again, you will have to watch over your margin number also. The two percent margin number is a requirement for you to conduct a trade. It means that you have to have a two percent of the intended trade number in your account.
All About the margin close out
In forex trading, there is also a risk management system that is usually known as the margin close out. Margin close out is basically your safety net when the forex trading market is crashing on your account. The thing is when you are conducting a forex trading you are using your broker’s money. And they certainly do not want to lose any money especially through you. So in order to prevent that they will suggest you to conduct a margin closeout.
Margin close out signifies that you will take out your account right before your losing accelerating. You will then close your account on the best price scenario. In doing so you are not losing a lot of your money, and you certainly are not losing your broker’s money. But the thing is, even though you are using a margin closeout, you will still lose a lot of money from your account. In fact, most of scenario like this will make you lose around fifty percent of your overall account. Of course, there are so many pros and cons about using margin close out. But it is a discussion for another time.
Summing up the Pros and cons of leverage
As you might already know, leverage is basically borrowing someone else’s capital to bring you a higher position in the market. By having a larger position in the market you can earn more money in the trading. With the 50:1 ratio, for instance, you can earn fifty times more money from your initial account. You will be able to earn more profit by using the technique of leverage. You also have learned about the danger of using leverage. First of all, you might lose just as much as you might win. So if you are not careful, you might just lose all of your money in a matter of second. Luckily, every broker usually has what they call a margin closeout policy. This policy is not only protecting you but also the broker themselves as they are using their money to lend you.