Page 53 - Module1_Introduction_to_the_Forex_Environment

Module 1 – Lesson 11 – Leverage & Margin closeout

Trading currencies online is accessible for many traders and Understanding the
whilst each person will have their own reasons for trading in this
market, the level of financial leverage available remains one of the use of leverage
most popular reasons for traders choosing the FX market. If you
are a newbie to the trading environment, you may be asking 'what Leverage is the ability to use
is leverage in Forex trading?' and 'how can it be useful?'. something small to control
something big. Specific to forex
1. what is leverage in fx? trading, it means you can have a
When visiting sites that are dedicated to trading, it's possible that small amount of capital in your
you're going to see a lot of flashy banners offering something like account controlling a larger
0.01 lots, ECN and 500:1 leverage. While each of these terms may amount in the market.
not be clear to a beginner, the request to have Forex leverage
explained seems to be the most common one. Stock traders will call this trading
on margin. In forex trading, there
Financial leverage is an account boost for Forex traders. With the is no interest charged on the
help of leverage, a trader can open orders that can be as large as margin used, and it doesn't
1,000 times more than their own capital. In other words, leverage matter what kind of trader you
is a way for a trader to trade much bigger volumes than he would are or what kind of credit you
using only his own trading capital. have if you have an account and
the broker offers margin, you can
Many traders would define leverage as a credit line that a broker trade on it.
gives to his client. This isn't exactly true, as leverage does not have
the features that are issued together with credit. First of all, when The obvious advantage of using
you are trading with leverage you are not actually expected to pay leverage is that you can make a
any credit back. You are simply obliged to close your position or considerable amount of money
keep it open before it is closed by the margin call. In other words, with only a limited amount of
there is no particular deadline for settling your leverage boost capital.
provided by the broker. Besides that, there is also no interest on
leverage - instead FX Swaps are usually what it takes to transfer The problem is that you can also
your position overnight. However, unlike regular loans, the Swap lose a considerable amount of
payments can also be profitable for a trader. money trading with leverage. It all
depends on how wisely you use it
To sum up, leverage in Forex trading is a tool that increases the and how conservative your risk
size of the maximum position that can be opened by a trader management is.

2. how does forex leverage work?
Let's say a trader has 1,000 USD on his trading account. A regular
1 lot on MetaTrader 4 is equal to 100,000 currency units. As it is possible to trade mini and even micro lots
with IFX Brokers, a deposit this size would allow a trader to open micro lots (0.01 of a single lot or 1,000
currency units) with no leverage in place. However, as a trader would usually be looking for around 2% return
per trade, it could only be equal to 20 USD. Therefore many traders decide to employ gearing, also known as
financial leverage, in their trading - so the size of the trading position and profits could be higher.

Let's assume a trader with 1,000 USD on their account balance wants to trade big and his broker is supplying
a leverage of 500:1. This way a trader can open a position that is as large as 5 lots, when it is denominated in
USD. In other words, 1,000 USD * 500 (the leverage), would equal a maximum size of 500,000 USD for the
position. This way a trader can actually request his orders of 500 times the size of his deposit to be filled. This
is an important point to take home in understanding leverage in Forex.

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