LEVERAGE

LEVERAGE

In this lesson, you will learn:

• How to use leverage and earn 500 times more than with your regular investments

During the last decade, there have been several major economic events that had a massive impact on the Forex market.

For instance, a surprise move of the SNB in January 2015, which was later named ‘francogeddon’, caused the Swiss franc to soar by around 30 percent in value against the euro within minutes.

In October 2016, the pound sterling dropped 9% against the US dollarwithin seconds in overnight trading. The incident was described as a ‘flash crash’.

Such events allow traders to achieve large revenues in a short period of time.
But usually, currency quotes tend to change in a very small percentage.

To earn a tangible amount on Forex you might have to wait for a next major economic event and invest a huge amount of your personal funds and ignore all rules of risk management.

Luckily, there is a leverage that your broker is ready to offer you any time you open an order.

Leverage is a loan that multiplies your initial investment. Your broker provides you with it at the moment you open an order.

Leverage is expressed in ratios.

If the leverage is 1:2, it means that you can hold a position twice bigger than your initial investment.

The leverage 1:100 allows to open positions 100 bigger.

Assume you have $2000 on your trading balance, and you wish to invest it in USDJPY without leverage.

That enables you to trade 2 micro lots of the pair. You open a buy order at the price 110.872 and hold the trade for about 37 hours until you close it at 112.482. During that time, the price has increased by 161 pips.

The price of a pip, in this case, is $0.09.
This way you have earned $14.49.

Your $2,000 allow you to hold $100,000 of capital.

That enables you to trade a full-size lotof USD/JPY.

Each pip in the pair is now $9.09 worth. If you make 161 pips, you earn $1463. You, therefore, increase your balance by 75%, lifting it to $3463. You can only achieve such an impressive outcome on the Forex market if you apply leverage.

To gain a profit of 1.5% of your initial investment is reasonable for such a short time.
But let’s see what you can gain from this trade using 1:50 leverage.
However, do not forget about risks.
If you lose 161 pips in your USD/JPY trade, you lose $1463, and your balance drops to $537.

Using high levels of leverage, you can quickly double your trading account balance, but you can equally fast run into the opposite result and reduce your trading funds to zero.

That is why you should not invest a substantial part of your balance into one trade no matter how much you could potentially earn.

In the trading world, you often hear that Leverage is a Double-Edged Sword.