Leverage
Strictly speaking, through leverage the forex broker lends you money so that you can trade bigger lots:
Leverage depends on the broker and its flexibility. At the same time, lLeverage varies: it can be 100:1, 200:1, or even 500:1. Remember that with leverage you can use $1,000 to trade $100,000 (1,000×100) or $200,000 (1,000×200), or $500,000 (1,000×500).
This sounds great, but how does it actually work? I open a trading account and I get a loan from my broker as simply as that?
Firstly, it depends on what type of account you open, what the leverage for that particular account type is, and how much leverage you need. Don’t be greedy – but don’t be too shy, either. Leverage can be used to maximize gains – but also losses, if you are too greedy.
Secondly, your broker will need an initial margin on your account, that is, a minimum deposit.
How this works?
You open a trading account that has a leverage of 1:100. You want to trade a position worth $500,000 but you only have $5,000 in your account. No worries, your broker will lend you the remaining $495,000 and sets aside $5,000 as your good faith deposit.
The profits that you make by trading will be added to your account balance – or, if there are losses, they will be deducted. Leverage increases your buying power and can multiply both your gains and losses.
Always choose a broker that offers no negative balance protection, and so your losses will never exceed your capital. This means that if your loss reaches USD 5,000, your positions will be closed automatically so that you will not end up owing money to your broker.
Strictly speaking, through leverage the forex broker lends you money so that you can trade bigger lots:
Leverage depends on the broker and its flexibility. At the same time, lLeverage varies: it can be 100:1, 200:1, or even 500:1. Remember that with leverage you can use $1,000 to trade $100,000 (1,000×100) or $200,000 (1,000×200), or $500,000 (1,000×500).
This sounds great, but how does it actually work? I open a trading account and I get a loan from my broker as simply as that?
Firstly, it depends on what type of account you open, what the leverage for that particular account type is, and how much leverage you need. Don’t be greedy – but don’t be too shy, either. Leverage can be used to maximize gains – but also losses, if you are too greedy.
Secondly, your broker will need an initial margin on your account, that is, a minimum deposit.
How this works?
You open a trading account that has a leverage of 1:100. You want to trade a position worth $500,000 but you only have $5,000 in your account. No worries, your broker will lend you the remaining $495,000 and sets aside $5,000 as your good faith deposit.
The profits that you make by trading will be added to your account balance – or, if there are losses, they will be deducted. Leverage increases your buying power and can multiply both your gains and losses.
Always choose a broker that offers no negative balance protection, and so your losses will never exceed your capital. This means that if your loss reaches USD 5,000, your positions will be closed automatically so that you will not end up owing money to your broker.
