Regardless of whether you are a new or experienced forex trader, one term you will come across very quickly in the industry is leverage. Leverage is facilitated by margin. This margin is a loan granted to you by the broker or online trading platform in order to increase your purchasing power to make the trades you want.
The first thing you should do when you begin to develop an interest in leverage trading in the forex market is to establish an account with a forex broker. As mentioned, leverage trading increases your purchasing power by the applicable proportion. For example, with an account balance of $10,000 leveraged at a ratio of 1:30, you could engage in online forex trading of up to $300,000 in that market. At the conclusion of your trade, you must repay the amount borrowed on the broker’s margin, in this case, $290,000.
What is Financial Leverage?
Financial leverage is a tool used in trading that allows you to get involved in the market for a certain amount of money even if you do not have the entire sum in your account. In other words, it is a mechanism that allows you to borrow money from the intermediary (broker or bank) to open a position on the market, with a smaller investment.
In fact, every day the futures contract can move in our favor or against us. In this sense, a maintenance margin must always be considered which therefore significantly reduces the leverage effect. Another factor to consider is that brokers do not all ask for the same margin, even if it is generally similar. That’s why choosing the “right” forex trading app is a must. Lastly, the margin is also linked to the type of underlying that is involved and is not necessarily linked to derivative instruments.
How is Financial Leverage Calculated?
The operation of financial leverage supposes, for example, investing only 100 dollars, but opening a position worth more than 1000 dollars. The missing money is put in by the broker. Therefore, the profit deriving from the operation or any loss is calculated on the money invested, i.e. 1000 dollars. Therefore, through financial leverage, it is possible to record a profit from a specific buying and selling operation that is higher than the profit recorded with the initial 100 dollars. The use of financial leverage is agreed upon with the broker in exchange for a guaranteed margin of the position on your account, calculated as a percentage of the value of the open position.
Factors to Consider During Leverage Trading
Leverage trading is, of course, widely used, and can be extremely beneficial when you discover an opportunity in a particular market and want to take advantage of it. However, there are certain risks and some points to keep in mind before taking advantage of even the best online forex broker.
Interest and commissions are primary factors to consider. Your leverage is based on margin. This is a broker loan and is subject to fees and interest. You should carefully review this and other fees, such as interchange fees.
The very important factor that should not be overlooked when using leverage is risk. Naturally, this can work very well and be profitable when the market is in your favor. In this case, the profits can be greatly amplified.
Maximize your Commercial Profit
You can find many forex trading blogs that will tell you about the benefits of leverage. However, maximizing your trading profit is all about how you manage the leverage available to you. When applied in the right situations, it can greatly increase your profitability as a trader. To achieve the best results from your use of leverage, you should also ensure that you are trading through the best forex trading company that will provide you with the best quality assistance in terms of customer service.
The Risks
It seems clear that the risks of financial leverage are inherent in the opportunity of the leverage effect. In fact, returning to the example given above, if the operation had gone wrong you would have lost 5% of the margin in a single day, which I remember must be reintegrated into your account in order to continue operating with that derivative instrument. Furthermore, the risk of financial leverage becomes explosive in phases of high volatility. In fact, we know that when particular news comes out that inflames the market there can be movements much higher than average. A day with a movement of a certain market of 4% can cause a loss equal to 40% of the margin, if we remain within the scope of the initial example with margin 10.
It Can be a Wonderful Asset
Leverage trading can be a wonderful asset for your trading career, and will really help you improve your position in the forex market. Once you have understood the best situations to apply and the leverage limitations, you will be in a good position to trade with a high degree of success.
