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What leverage of 500:1 means you can achieve a $500 notional exposure in the forex market. This doesn’t mean a cash balance of $1,000 will force you to enter trades of $500,000 (the maximum leverage possible).
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This is where position sizing is important. Naturally, the scale of leverage our traders use carries varying degrees of risk, so understanding your correct position sizing is important. Higher leverage offers increased market exposure, which can be attractive for those with the experience and skills who can harness this to drive larger swings in profit or loss (P&L), or detrimental to the portfolio of someone new to trading without a risk management plan in place. Read more about how to manage risk and calculate your position size. Margin is a function of the desired notional exposure to a particular market and the leverage ratio.
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For example, you want to buy 0.1 lots (10,000 units of the base or first-named currency) of EURUSD at the current offer price of 1.13500, and with a leverage ratio of 30:1.
If the base currency of the account is in EUR, then we calculate the initial margin as: (1.13500 * 10,000) / 30 = $378.33.
It effectively allows you to understand how much risk you’re taking on in any given trade. It’s important to understand that a stop-loss is a market order and a trigger point.
These are a measure of the price change that will determine your profit and loss. The number of decimal places you see quoted for an instrument (such as EURUSD) on Metatrader 4, 5 or cTrader will determine the movement in pips.
- 5 decimal place currency pair a pip is 0.00010
- 3 decimal place currency pair a pip is 0.010
- 2 decimal place currency pair a pip is 0.10
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Trader tip: A pip is always the second last digit. A point is always the last digit. For example, if you want to purchase (long) of 0.1 of a lot in EURUSD at 1.13500 moves to 1.13510, that .00010 USD move higher is a gain of one pip which is 10 points.
- If the interest rate of the currency a trader bought is higher than the corresponding interest rate of the currency a trader sold, then the trader will earn interest.
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Long and Short
- To be long is to buy, or to take a view that the price will appreciate. Leverage Trade Forex
- To be short is the same as selling short to open a trade and holding a negative bias that the price will decrease.
It can be a useful tool to practise your trading strategies on before stepping up to a live account. Open a demo account today and start trading with virtual funds -10 trading terms you need to know
hese are two important disciplines that sit at the heart of the trading plans and methodologies that we use to define our trading edge and develop a positive expectancy. Forex Signals Margin and Leverage
Many will look at trading one in isolation, however, combining the two disciplines can be incredibly powerful.
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