Learning Investment09 - The
concept of leverage is very profitable in forex trading, but also can be
dangerous if you are not careful in using it, especially when you are using
very high leverage (leverage over). High leverage will cause a minimum margin
or minimum guarantees that you pay each time a transaction are fewer and fewer.
This will psychologically affect your trading.
One
of the characters of successful forex traders are those who can eliminate the
influence of emotions when trading. When people talk about the advantages of
trading forex, the first time they put forward is usually a high leverage
facilities, or even very high. With certain leverage, you can reach tens or
even hundreds of positions with relatively small capital. This can be done only
by a relatively small margin collateral, and this is what makes one of the
charms of forex trading. Nowadays many brokers that offer leverage of 1: 100,
1: 200, 1: 400 and even 1: 1000.
If
you are trading on a broker with leverage facility of 1: 1000, then for a
contract value of USD 10,000 (commonly called a mini lot) you only pay a margin
of (USD 10,000 / 1000) = USD 10 for each transaction (0.1 lot for mini lot ),
with the value per pip (pip value) calculation of the contract value in
accordance mini lot (eg for EUR / USD with a contract value of USD 10,000, its value
per pip is USD 1). Thus if your capital is $ 500 and you open up 30 positions
(each 0.1 lot) with a leverage of 1: 1000, the total margin that you need is $
10 x 30 = $ 300.
If
for any position you obtain a profit of 10 pips, then your total profit is $ 10
x 30 = $ 300, or 60% of your capital. Conversely, if you experience a loss
average of 10 pips, then your loss is also 60% of your capital, and in the
forex market such events can take place in a matter of minutes, even given the
spread your broker is zero (no spread).
Psychologically,
the higher the leverage you use, then you will be more brave (lots) in open
trading positions, because the value of the minimum margin that you pay will be
less. Just as if you are driving a car, driving with a speed of 60 km / h and
200 km / h is certainly very different in anticipation if something happens.
High-speed more you drive, the greater the risk you face when something is not
profitable. In many cases, accidents due to driving at a very high speed end in
death.
Trading
forex with very high leverage can be compared to driving at a very high speed.
The risk is great enough. As you know that the broker gives a loan to you for
the remainder of the contract value which should be reduced to the minimum
margin that you pay. In case you are trading mini lots with leverage 1: 1000,
the broker lends USD 10,000 - USD 10 = USD 9,990 for every 0.1 lot (for mini
lot) you open. Have you ever wondered why the broker does not charge interest
on the loan to you even if such trading position you hold for days or even
weeks?
Source:
www.dailyforex.com: Forex Trading: How To Leverage Really Works Against You