Lesson 6 – Leverage In Forex

AdminBy AdminNov 10, 20170

Leverage in Forex as well as for others in the markets where you can negotiate is a peculiarity of online trading, allowing you to invest on a large number of lots with a greatly reduced budget. In lesson 5 we looked at the different lots, or of the “packages” of actions or currencies on which to invest and who always have a “minimum lot” or a minimum amount of shares or currencies can negotiate.

Were it not for leverage, online trading virtually not exist. In fact, if you think of the shares by the high cost, it would be hard to find many buyers ready to spend tens of thousands of euro for one hundred actions. Instead, with online trading you can do Forex trading or other financial instruments with limited budgets but high amounts of shares or currencies.

What Is Leverage?

What Is Leverage?

Now let’s see what is the leverage. First, the term refers precisely to the effect of the lever in the physical jargon, where it is used to indicate a mechanism that allows to lift a heavy weight with an effort (force) less than that of the opposite weight. For example one might raise 100 kg with a force of 5 kg.

Here, of course, we are not here to give lessons in physics, but this way we can better explain the concept of leverage.

Keeping this figure, imagine if instead of kg there were the euro. With € 5 we could move € 100: in this case we would have a leverage of 1:20 (one to twenty). With a 1:50 leverage we could move € 1,000 with € 50.

How Does The Forex Leverage?

How Does The Forex Leverage?

We respond to these two questions from the last. Leverage is always the first aspect on which “made use” (pardon the joke) brokers in order to attract its customers. To provide this facility, the broker must, however, ensure the solvency of the customer, the question that forces us to answer the first question. How is it possible?

Financial leverage is like a small loan: the broker allows us to carry out large-scale operations and budgets but obviously needs to protect himself in case the trader is unable to operate it correctly, and you face overwhelmed by unexpected results.

For example, if you want to do crazy and invest EUR 100 in a society that loses because today I woke up like this, the decline will start to make me lose and then the broker will receive the type of “signals this trader is losing a lot and are using the lever it would be better to ask him a small sum to cover any risks. ” This sum is called the margin, which in fact you also pay early. This margin has precisely the function to cover any wrong operations of traders, as the broker via the lever is financing the missing part of what is lacking to the trader to operate with the prices of actual lots

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