Leverage is the amount of loan taken from a broker to enhance your profit rate during the trade. It will always take from a Forex broker. The brokers offer this to increase your earnings and control the market size. It is being provided in an initial margin sense so that a trader can make a good reputation in the market. Margin-based leverage is calculated by dividing the total amount of transactions by the amount of loan you need.
For example, if you want to trade in one standard lot of USD/CHF, you will be asked to deposit 1% of the total transaction. It is equal to US$100,000, and the required amount of margin would be US$1,000. Thus, the margin-based leverage ratio will be 100:1. Learn about tickmill bonus.
Working Criteria of Leverage
We will clear the working principle of leverage in Forex trading with an example.
Suppose you have $1000 as your account balance. The leverage ratio is 1:100. And you want to buy EUR/USD pair which has a volume of 10,000. You bought it when trading on 1.0950 and set a stop-loss order on 1.0850. The amount of margin necessary will be $109.50. If you find it difficult to calculate, you can use the Margin calculator. If the market goes in the opposite direction, you will lose $100 because the value of one pip in the EUR/USD currency pair is equal to one.
Risk of Leverage
Forex trading offers a high amount of leverage which boosts your profit. At the same time, the risk of losing money is on the way. You may lose a considerable amount of investment just in seconds. So, proper management of this risk is necessary.
Leverage Risk Management
The strategy of Effective Risk-Management is necessary to use Leverage in Forex trading. The brokers are offering a healthy Leverage offer some risk managing tools that help the traders avoid these risks conveniently. These tools include;
Ø Stop-loss order tool comes into play when market conditions are unsuitable and lessens your loss by moving you out of the trade circle. First, you set a limit of loss that will continue trading till that limit. The stop-loss order cannot work when you fail to meet that standard, and the stop-loss order cannot work. It also fails to guarantee the close-out price.
Ø Second one is Trailing stop-loss. When the market conditions become favorable for you, this comes into play. Trailing stop-loss does not leave any chance of encouraging movement in price. It secures this moment for traders.
Ø You can trade at a price of your choice through a guaranteed stop-loss order. It works irrespective of the market conditions, whether volatile or gapping. You have to pay a premium for it available on the order ticket. If GSLO does not work, we will refund compensation.
Ø Fourth is Take profit order which works on a similar mechanism to limit demand. When the value of a product becomes favorable, it places your order immediately.
In this article, we discussed what Leverage is in Forex trading? How does it work? We also discussed Leverage risks and some of the tools offered by brokers to manage the Leverage risks.
Hamza shafaqat is an Author on Universelblog.com, I have completed BS IT from the University of Lahore.