When it comes to forex account leverage trading, many traders, especially the new ones, need to understand various concepts regarding the term “leverage”. Leverage trading is a popular financial tool that gives you the ability to use something small to control something big. This means you can have a small amount of capital in your account to control a large amount of money in the market. But wait, there’s more to know about leverage in trading.
What Is Leverage in Trading?
Leverage in trading refers to the way for traders to borrow capital from the broker for a short term in order to facilitate investment, thus gaining a larger exposure to the FX (Forex) market. In short, it enables you to control a big position with a relatively small capital and maximize your profits.
However, it is essential to know that with the use of leverage, not only your profits, but the losses will also be magnified. In unfavorable market conditions, traders using leverage might result in losing all money they deposited.
When a position in leveraged trading is closed, the borrowed funds are returned to the broker. This is when it is known either the trader is entitled to the profit or is responsible for the loss.
The trader must make a deposit equivalent to a portion of the value of their trade in order to access and uphold a leveraged position.
The trading leverage is frequently represented as the ratio of leveraged funds to account funds that the brokerage allows in relation to the margin. For instance, if a trader has a trading account leverage of 1:1000, it means that the trader can enter a position 1000 times the size of their margin.
HOW IS FOREX LEVERAGE CALCULATED?
To calculate leverage, traders need to know about the following requirements:
• Trade size (The notional value of the trade)
• The margin percentage
More often than not, brokers provide traders with a margin percentage, which is used to calculate the minimum equity needed to fund the trade. You can use the margin and deposit interchangeably. Once you have the margin percentage, all you have to do is multiply the percentage with the trade size to see how much equity is required to execute the trade.
Equity = margin percentage x trade size
Note: Margin is usually expressed as the amount of money needed as a “good faith deposit” to open a position with your broker.
Now, if you want to calculate leverage, simply divide the trade size by the required equity.
Leverage = trade size/ equity
FOREX LEVERAGE EXAMPLE
With the help of the above formulas, you can now easily calculate leverage. Here’s an example:
• Trade size: 10,000 units of currency (one mini contract on USD/JPY with a trade size equal to $10 000)
• Margin percentage: 10%
Equity = margin percentage x trade size
0.1 x $10 000
=$1 000
Leverage = trade size/ equity
$10 000 / $1 000
= 10 times or 10:1
The above example is a perfect demonstration of how forex leverage is used when entering a trade. However, it is important to know that traders should not simply enter a trade with a minimum amount and then deposit the account with that exact amount. But they should be aware of the margin calls if the position goes in the opposite direction, pushing the account equity below an acceptable threshold limit set by the broker.
The Bottom Line
Choosing the appropriate forex leverage level usually depends on a trader's experience, risk tolerance, and comfort level, which plays a crucial role when operating in international forex markets. As new traders learn how to trade and gain expertise, they should get more familiar with the terminology while maintaining a conservative stance.
Want to be a successful trader? Offering a forex account leverage of 1:1000, NordFX allows you to make transactions for the purchase/sale of a foreign currency or other financial instruments worth 1,000 times more than your own funds, safely and securely. Whether you are a beginner or an experienced trader, this company is considered to be a safe broker that you can trust. It has clients in over 190 countries and has exceeded 1,700,000 accounts as of today. To start trading, visit nordfx.com today!
Forex account leverage: Everything you need to know
When it comes to forex account leverage trading, many traders, especially the new ones, need to understand various concepts regarding the term “leverage”. Leverage trading is a popular financial tool that gives you the ability to use something small to control something big. This means you can have a small amount of capital in your account to control a large amount of money in the market. But wait, there’s more to know about leverage in trading.
What Is Leverage in Trading?
Leverage in trading refers to the way for traders to borrow capital from the broker for a short term in order to facilitate investment, thus gaining a larger exposure to the FX (Forex) market. In short, it enables you to control a big position with a relatively small capital and maximize your profits.
However, it is essential to know that with the use of leverage, not only your profits, but the losses will also be magnified. In unfavorable market conditions, traders using leverage might result in losing all money they deposited.
When a position in leveraged trading is closed, the borrowed funds are returned to the broker. This is when it is known either the trader is entitled to the profit or is responsible for the loss.
The trader must make a deposit equivalent to a portion of the value of their trade in order to access and uphold a leveraged position.
The trading leverage is frequently represented as the ratio of leveraged funds to account funds that the brokerage allows in relation to the margin. For instance, if a trader has a trading account leverage of 1:1000, it means that the trader can enter a position 1000 times the size of their margin.
HOW IS FOREX LEVERAGE CALCULATED?
To calculate leverage, traders need to know about the following requirements:
• Trade size (The notional value of the trade)
• The margin percentage
More often than not, brokers provide traders with a margin percentage, which is used to calculate the minimum equity needed to fund the trade. You can use the margin and deposit interchangeably. Once you have the margin percentage, all you have to do is multiply the percentage with the trade size to see how much equity is required to execute the trade.
Equity = margin percentage x trade size
Note: Margin is usually expressed as the amount of money needed as a “good faith deposit” to open a position with your broker.
Now, if you want to calculate leverage, simply divide the trade size by the required equity.
Leverage = trade size/ equity
FOREX LEVERAGE EXAMPLE
With the help of the above formulas, you can now easily calculate leverage. Here’s an example:
• Trade size: 10,000 units of currency (one mini contract on USD/JPY with a trade size equal to $10 000)
• Margin percentage: 10%
Equity = margin percentage x trade size
0.1 x $10 000
=$1 000
Leverage = trade size/ equity
$10 000 / $1 000
= 10 times or 10:1
The above example is a perfect demonstration of how forex leverage is used when entering a trade. However, it is important to know that traders should not simply enter a trade with a minimum amount and then deposit the account with that exact amount. But they should be aware of the margin calls if the position goes in the opposite direction, pushing the account equity below an acceptable threshold limit set by the broker.
The Bottom Line
Choosing the appropriate forex leverage level usually depends on a trader's experience, risk tolerance, and comfort level, which plays a crucial role when operating in international forex markets. As new traders learn how to trade and gain expertise, they should get more familiar with the terminology while maintaining a conservative stance.
Want to be a successful trader? Offering a forex account leverage of 1:1000, NordFX allows you to make transactions for the purchase/sale of a foreign currency or other financial instruments worth 1,000 times more than your own funds, safely and securely. Whether you are a beginner or an experienced trader, this company is considered to be a safe broker that you can trust. It has clients in over 190 countries and has exceeded 1,700,000 accounts as of today. To start trading, visit nordfx.com today!
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