How is leverage supposed to work in Forex?

Beginner Questions
1

Hi, it seems starting out with forex trading, everyone keeps going on about leverage can be a killer, you gotta understand leverage etc.

But having done a few demo trades now, I’m unsure of how the leverage works and how to work out whether i’m even using any leverage.

Before I get too ahead of myself, I might just explain how I generally place a trade.

Ok so my demo account has $20000 USD in it, and I’m trading the EURUSD. Each trade I risk 1%, so I risk $200.

My next step is to find a trade I like. Once I do, I look at where my stop loss and look at how many pips I’m risking.

Then I input the data into this calculator (Position Size Calculator: Free Online Forex Position Sizing Calculator) so that whatever happens, the maximum I can lose is $200.

So for example, if I put a trade on, and I’m risking 50 pips, I’ll put it in the calculator, and it returns that my position size should be 40000 units. I then enter that as my volume when making the trade.

My question is, well where does leverage come in here? As long as I know how much I’m standing to risk, do I have to care about leverage at all now?

2

You need to understand how leverage works so you know your margin requirement per trade. Since you are using a stop loss you will not blow up your account on one single trade.

Here is how leverage works:

Let’s say you fund your real account with $500 and you accept leverage of 1:200. This means you can operate your portfolio with $100,000 ($500 x 200).

Let’s say you decide to trade the EURUSD and it trades at 1.3000 and that you want to trade 10,000 currency units (0.10 lots). YOu would multiply 10,000 x 1.3000 and divide the result by your leverage which in this case is 200. This will leave you with the following result: $65. This means that you will have to pay $65 and have $435 in your account to trade.

Should your leverage be 1:100 the amount you have to pay for that trade would be $130, while 1:500 leverage would leave you at $26.

So it is very important to understand how leverage will affect your account. The higher the leverage is, the more money each pip will translate into and therefore a 25 pips move with leverage of 1:100 will not equal the same as a 25 pips move with leverage of 1:500.

Hope this helps.

3

Sorry I’m still not really understanding. Can we talk about it in terms of my set up and you can tell me where I’m understanding it wrong?

I have $20000 USD in my demo account - now is that supposed to mean I have $20000 or that I have $20000 that I could potentially borrow to trade but that in reality, I only have like $2000 or whatever (say if I had a leverage ratio of 20:1)?

Cause I’ve been taking it to mean the former, I have $20000 in my account which is my money. Does that mean my leverage is 1:1?

Is that normal for people to be trading with a leverage of 1:1? If so, then do people normally work out their risk ratio based on how much they can borrow or how much they have?

So say if I had only $10000 of the $20000 I currently got (which gives me a leverage of 2:1), if I put a trade in where I’m risking $200, does that mean my risk ratio is 2%? Or is it still 1% because $20000 is technically what I have to trade with?

4

Boom, read this page from start to finish Lots, Leverage, and Profit and Loss | How Do You Trade Forex? | Learn Forex Trading

Than re-read Thelastbear’s explanation above, if you still don’t get it than will be happy to break it down further…

5

With leverage we can trade by using less amount from our account balance and trade more than that. Suppose if we use $1 in trading we can buy of worth 1000 units from market. Leverage support every trader small or large investors. Small investors can trade with low capital and high investors can save their capital by using some part of it in trading.

6

BeginnerYeah, I think you should try what Bitterseatrader recommended and if you still don’t understand it come back here and we will try again.