I have a question that is always in my mind, what does the leverage do?
Like what is the difference between 1000:1 or 500:1 leverage ?
Simply ... if you have 1.000 $ deposit at your account, you can trade up to 1.000.000 $ with 1:1000 leverage ... or 100.000 $ with 1:100 leverage.
As you see, not in real life, the banks are so generous and good in FX market.
They want you to be rich as quickly as possible.
So ... they are allowing you to trade up to 1.000.000 $ if you put 1.000 $ in cash in their hands.
See illustrations below
Lets assume an investment or capital of $1000 with a leverage of 1:1000, the resultant effect would be (Capital x Leverage = Position Size); i.e. ($1000 x 1000 = $1,000,000)
Lets say the change in value (BUY or SELL) of a currency after trading was +0.0010 i.e. 10 pips or points. Then the profit made on a 1:1000 leverage = +0.0010 x leverage (1000) = $1000 Profit
Balance in account = Profit + Capital = $2000
Do forget it can go both ways, both of the above examples show winning and doubling you're money, the flip-side in these examples is losing the trade which is all your money
If you're just starting go with the lower leverages and don't ever risk more that 1-2% of you total balance on one trade
It kills you :)
About Mr Margin Call -
Forum on trading, automated trading systems and testing trading strategies
Sergey Golubev, 2018.07.25 14:25
Margin Call: What Happens When A Margin Call Takes Place and How to Avoid (adapted from the article)
To understand the cause of a margin call is the first step. The second and more beneficial step is learning understanding how to stay far away from a potential margin call. The short answer as to understand what causes a margin call is simple, you’ve run out of usable margin.The second and promised more beneficial step is to understand what depletes your usable margin and stay away from those activities. In risk of oversimplifying the causes, here are the top causes for margin calls which you should avoid like the plague (presented in no specific order):
What Happens When A Margin Call Takes Place?When a margin call takes place, you are liquidated or closed out of your trades. The purpose is two-fold: you no longer have the money in your account to hold the losing positions and the broker is now on the line for your losses which is equally bad for the broker.How to Avoid Margin CallsLeverage is often and fittingly referred to as a double-edged sword. The purpose of that statement is that the larger leverage you use to hold a trade greater than some large multiple of your account, the less usable margin you have to absorb any losses. The sword only cuts deeper if an over-leveraged trade goes against you as the gains can quickly deplete your account and when your usable margin % hits, zero, you will receive a margin call. This only gives further credence to the reason of using protective stops while cutting your losses as short as possible.
Something about the leverage -
Something Interesting in Financial Video
Sergey Golubev, 2018.07.25 14:20
Video Lesson: How to Trade - The Leverage
One of the great things about the forex market for individual traders and one of the reasons we are starting with the forex market as our first market specific course is the availability of real time demo accounts. Unlike the equities and futures markets where one must pay the exchanges to get access to real time data, most forex brokers not only provide free real time quotes and charts but they also give you access to the same platform that their live traders trade on and the ability to trade there with virtual cash. This is a nice perk especially for beginner traders, as it allows them to get to know the market and the logistics of placing trades in a real time environment but without risking any real money.
Leverage in forex = Purchase Power/Capital Invested = $100,000/$1,000 = 100
This leverage ratio of 1:100 is translated as following:
Remember, a 25% loss requires a 33% return to get back to break even. If a 25% loss in a fast moving market is difficult enough to overcome, imagine how challenging it would be to overcome a 25% loss in a slow moving market. Therefore, de-emphasize each trade and think of the next trade simply as the first of ten trades rather than the next homerun.You can reduce the emphasis by implementing less than 10x effective leverage. Effective leverage is simply taking the total notional trade size and dividing it by your account size. The result will indicate how many times you have your equity levered. According to our research, we recommend implementing less than ten times effective leverage.Incorporating smaller trade sizes and less leverage will alleviate the stress of having to produce a profitable trade. As a result, you’ll be more likely to let the trade develop and let the trade evolve in the way the patterns indicate.