Leverage Side
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Leverage Side
Join the largest market in the world by using forex leverage
In the past decade, there has been an overwhelming number of people who have started to trade currencies because they can multiply their money by using very high leverage.In a simple way, leverage means multiplying a small amount of money by borrowing from a broker. In forex, leverage is a loan provided by the forex broker to the forex retail trader.
Historically, the amount of leverage provided by forex brokers has varied from 50:1 to 400:1.As an example,with a broker margin of 1%, you have to deposit only $100 into your trading account to trade $10,000 worth of currencies. In this respect, forex margin and forex leverage are two sides of the same coin so much so that in the above example you would leverage your margin to trade $10,000 worth of currencies. This is in fact the main idea behind the concept of margin-based leverage.
In forex, prices move by small amounts and one pip represents the smallest change in currency prices . As an example, if the USD/CHF moves from 1.1200 to 1.1300, this 100 pip move is equivalent to only a $0.01 change in the USD/CHF exchange rate. This explains why foreign exchange trading should be carried out in large amounts of money so as to permit these small incremental moves to translate into measurable profits or losses. And in comparison to large hedge funds and big banks most traders do not have the financial capacity to trade forex in thousands of dollars. This is argued to be the main reason why there is high leverage in the forex market.
Though leverage is a tool that can significantly magnify your profits it can be equally detrimental. Let us now take an example to see why and how this occurs. We assume that there are two forex traders Y and Z and each has $5000 as trading capital. Furthermore both of them trade with broker X who offers a margin of 1%.After applying some technical indicators on the USD/CHF chart, both agree that it will fall in value over the next few days, and thus both decide to sell the pair at 1.1200.
Y who is a risk lover decides to apply maximum real leverage of 100 on his $5000, and so shorts $500,000 worth of USD/CHF (100 x $5,000) .Given that the price of the USD/CHF is at 1.1200, one pip for one standard lot ($100,000) is worth around $8.92, and consequently one pip for 5 standard lots equals $44.60.Unluckily the price of USD/CHF increases to 1.1300 and Y loses 100 pips which equals to $4,460. This amount is in fact 89.2% of Y's $5,000!
Trader Z who is far less adventurous decides to apply 5 times real leverage on his trading capital, and so sells only $25,000 of USD/CHF (5 x $5,000).This $25,000 represents only one-quarter of 1 standard lot. When USD/CHF increases to 1.1300, that is, by 100 pips, Trader Z loses $223. But here the percentage that Trader Y loses is much smaller compared to Trader Z, and is in fact only 4.46% of his trading capital.
It is important to point out the difference between real leverage and margin-based leverage .From the above example, Trader Y has used a real leverage of 100 times while Trader Z has used a real leverage of only 5 times.For margin-based leverage broker X allows both traders to leverage their margin by 100 times. However it is real leverage which is dangerous because you trade positions which are much larger than what you can really afford. For example, in terms of margin-based leverage Y has put $1,000 margin for each $100,000 and with real leverage has bought $500,000 with his trading capital of $5,000. In this sense he has used real leverage of $500,000/$5,000 =100:1. If he had bought only $100,000 of USD/CHF he would have used only 20 times real leverage and lost much less.
The explanation above should now give you a clearer picture why the CFTC has decided to reduce leverage to 50:1 for major currency pairs such as the USD/CHF. If broker X is forced to increase his margin from 1% to 2% (decrease his leverage from 100:1 to 50:1), this means that our Trader Y would also be forced to use less real leverage and as such would lose much less. On 18th October 2010 the CFTC has imposed a new rule on forex brokers requiring them to reduce leverage to 50:1 for major currency pairs .
About the Author
Learn about forex leverage http://www.forex-margin.net/forex-leverage/forex-leverage and other key concepts you need to be aware of when choosing your forex brokers http://www.forex-margin.net/forex-brokers-2/forex-brokers. These concepts are explained by forex expert Amit Achameesing.
Can anyone name one war that was not fought for gain?
Any war at all that was fought just because it was the decent thing to do. Where one side gained nothing though victory except the knowledge that they made the world a better place.
They didn't gain any political leverage, resources, money, land, people. Nothing at all.
No matter what perceptions you may have developed, war is an extreme resort and is ALWAYS committed for some purpose or gain. There is nothing "decent" about warfare. Any veteran can tell you this.
Team LeveraGe vs Optic - 25k Match Championship - Firing Range Domination - 2nd Side