To help the trader

The whole truth about leverage

Judging by the comments in the blog, I see that many people do not understand what leverage on forex .Also, among the beginners There is a myth that the higher the level of the shoulder - the higher the risk.Let's try to figure out whether this is so.

To begin with, let us be clear, what is is the most leverage.The shoulder may be of different sizes: 1:20, 1:50, 1: 100 or 1: 500.Some offices even offer a level of 1: 1000.Leverage allows you to trade more money than you have in your account, taking a loan from their broker.This can help increase your profits (or losses when the price goes against your position).

Consider an example.Ivan has an account with a broker $ 5,000 and decides to sell 1 whole lot USDJPY.By trading one lot, Ivan actually uses to trade $ 100,000.If he uses the leverage of 1: 100, in this case, a deposit of $ 1000 taken from his account, but $ 99,000 provides broker.Total 1 hundredth of the amount needed is with Ivan account.This is the power of the shoulder 1: 100.

And how broker defends itself against a possible loss of money?Very simple: the potential loss of Ivan limited to the amount in his account.Let's assume that the position opened by Ivan brings losses and the price continues to go up against him.

After reaching the level of the uncovered losses, say $ 4,000, (all Ivan balance of $ 5,000), the broker can call John and ask him to add money to the account or to close part of a losing position.This is called « Margin Call » (sometimes called Stop Out ).Call English .- Up, the margin - a margin deposit.Those.The term « margin call » literally means to call on the problems with collateral.In our digital age, of course no one is calling customers and position, the level of collateral for which belittles established broker level, closes automatically, without notice to the customer.

When a Margin Calll (margin call)?

In the case of Ivan, to open a position is taken from his account deposit of $ 1,000.Let's assume that the market is going against the position of Ivan (which was originally worth $ 100,000) and unclassified (floating) loss reaches $ 4,000.

So funds (equity) on account of Ivan is now equal to: 5000-4000 = $ 1,000. When the funds in the account are equal to or less than that required to maintain collateral positions, there is Margin Call . Different brokers and on different types of accounts, margin call level is different, but as a rule it is 20-50% of the required collateral.Those.when the funds in the account are reduced to, say 30% (the level may be different for different types of accounts) of the required collateral, there is an automatic closure of the trader's positions.

For example, on account of Ivan worked Margin Call.In this case, when the position is closed (for example with a loss of $ 4,500), it costs: $ 1,000 (initial pledge by Ivan account) + $ 99,000 (added by the broker as a loan) -4500 $ (loss) = $ 95500.

Broker will take all the money, plus pick up the missing $ 3,500 to return the $ 99,000, which he lent to the trader.Thus, the entire loss on the position is entirely falls on account of Ivan, which, after triggering margin call is only $ 500.

Similarly, if the position goes into profits, the entire profit gets Ivan, after the close position.

example, Ivan the broker borrows $ 99,000 and $ 1,000 bail taken from his account, this position makes a profit of $ 8000.And, when the position is closed, Ivan is $ 99,000 + $ 1,000 + $ 8,000 = $ 108,000.

on closed positions, $ 99,000 will be returned to the broker, $ 1,000 bail to return to the account of Ivan and a profit of $ 8000 and goes to his account.

This is leverage - a double-edged sword that can turn a small deposit into a lot of money, or finish off your account in no time :).

myth about the dangers of large leverage

There are two accounts: one with a leverage of 1: 100, the other with a leverage of 1: 500.On both accounts, we opened at the same position, say a lot buy eurusd 0.01.Question: on what account a greater risk?A: The risk is the same.Let's say we have lost 100 points, which is 0.01 when the lot is $ 10, except the amount of loss will increase or decrease the leverage level?No way.

Generally, high leverage allows you to open large positions in the presence of small funds in the account.No more.If you use an adequate level of risk, exercising prudent management of capital, then at least you have a leverage of 1: 100, at least 1: 500 - it does not change anything .

But if you want to play roulette, setting the score at any martingale adviser, or opening huge lots, then yes - high leverage will allow you to extend a little fun before the margin call.

summarize - leverage size does not affect the level of risk in the trade.On the level of risk influences the size of positions that a trader opens and nothing else.

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