When trading on the online currency market (or the Forex) you can use leverage, which means leverage. This means that you can control a multitude of capital with the capital that you have invested, while the rest is borrowed.
If a forex broker offers Leverage of 100: 1, this means that with an investment of $ 100, you can control 100x as much capital, or $ 10,000
You don’t notice anything else about borrowing, it is the broker who arranges that. If you hold a position for longer than a day, interest is charged, the so-called rollover rate (when position is not closed at the end of the day). Incidentally, that can also save you money; see the article ‘What is the Carry Trade?’ .
But most forex traders only hold positions for a few hours and therefore never come into contact with rollover rates.
How does Leverage work in forex?
Suppose you want to speculate on the rise of the Euro against the dollar, so you want to go long on the EUR / USD (more about how to open a forex trade). With many forex brokers, the smallest ticket is a mini ticket, representing $ 10,000. If there were no Leverage, you have to put $ 10,000 on the table to buy 1 mini lot. (you could say that you have Leverage of 1: 1).
With a mini lot, 1 pip is worth $ 1. Suppose your estimate was good and the EUR / USD rises 50 pips, so you have a $ 50 profit. unfortunately that is only an ieniemie return of 0.5%.
Now imagine the same situation, but now the forex broker offers you the option of Leverage 100: 1. That means that every $ 1 that you invest controls $ 100 in capital. For 1 mini lottery ticket of $ 10,000 you now only need $ 100. If the EUR / USD 50 pips rise, you have a $ 50 profit, or a super return of 50%!
It can of course go completely wrong. For example, if the EUR / USD drops 100 pips on the Forex, you will lose your $ 100 (if you have not set a stop / loss, because if you set a stop / loss of 25 pips, your loss is only $ 25). But you would also have lost the same $ 100 without using the Leverage, but you could only participate in the online currency market if you put at least $ 10,000 on the table. (and then you could only buy 1 mini lot with it)
Leverage in forex only benefits?
Yes. After all, an investor is offered the opportunity to trade with 100, 200 times as much capital as his own investment is worth. Interest does not have to play any role, because if you hold the position for less than a day, no interest will be charged. And furthermore, if you hold the position, interest will also be paid to you if the currency you sell has a lower interest rate than the currency you buy.
trade on the forex yourself
Simply put, if Leverage 100: 1 is offered, you can trade for free with 100 times as much capital as you have invested.
Why is Leverage called a “double-edged sword”? Because you increase your exposure, so to speak, and so you can lose just as high returns as you earn. If you invest $ 100 and thus increase the price of a pip in the EUR / USD to $ 1 per pip, and you lose 50 pips, you have a negative return of -50%
The mistake that many novice traders make is the misuse of leverage to risk a much too large percentage of their capital in a single trade. With that you break different basic rules for profitable investing, the most important of which may be that you always have to ensure that you have enough capital to stay in the game. If you are broke and can no longer play, you also deprive yourself of the opportunity to come back on top again.
But the fact that leverage is offered is 100% good news for every investor. After all, you can use a multiple of your own investment, for free.
How do you use Leverage correctly?
A good rule of thumb is that you must ensure that your total exposure in a single trade does not exceed 2 to 3%. This is often too conservative for many starting traders, because it actually means that you have to deposit around $ 1000 to trade a little.
Previously, the smallest lottery ticket for forex brokers was the $ 10,000 mini lottery ticket. With a mini lottery ticket, 1 pip is $ 1 as mentioned. If you then deposit $ 200 and start trading mini lots whereby you put 20 pips per trade (pretty tight though) then you risk 10% (!) Of your capital per trade. Even though you still have so much talent for forex trading, you make it very difficult for yourself.
On the other hand, there is of course quite something to be said for depositing $ 200 and seeing if you like Forex trading a bit, or if you like it enough to get serious with it. And if you’re lucky – and many of the current generation of traders started that way – you can turn that $ 200 into $ 1000 and implement a more conservative strategy.
These days, however, this is no longer necessary, because many forex brokers now also offer smaller lots, so-called micro lots. At forex broker eToro, micro lots are 10 times smaller than mini lots, so $ 1,000. That means that 1 pip is 10 cents. So you can buy a micro lottery ticket for $ 2.50 (leverage 400: 1). That means that with a deposit of just $ 100 you can already set up a conservative money management strategy where you use stops of 25 pips and risk only 2.5% of your capital per trade!