As you know, Forex trading requires certain investments. Often, beginning investors have a reasonable question: “How much money should be put into the account for normal trading?” When buying or selling any currency pair, in each application it is necessary to indicate the number of monetary units (volume) that will be involved in the upcoming trade transaction. measured in lots. 1 lot, as a rule, is equal to 100,000 units (Instaforex broker has it equal to 10,000). The minimum volume for a trading operation is 0.01 lots. If the current rate of the euro against the dollar is 1.29 (and for forecasts, he should grow a little)) then for the purchase of 0.01 lots, an amount of 1.29 * 100,000 * 0.01 = 1290 dollars is required.
Are there many traders who have an initial deposit of more than $ 1,000 on their account? The answer is obvious. And therefore, all brokers when opening an account suggest using leverage, i.e. the ability to trade with a larger amount than the one on deposit. The size of this leverage the trader has the right to choose at his discretion. On average, it ranges from 1:20 - 1: 500, and for some brokers this parameter can generally reach 1: 1000.
Forex trading without leverage is, in principle, possible, but this option is only good for those who adhere to a conservative trading style and have relatively large funds for financial activities. And the vast majority of traders need leverage, since without it they would not be able to work in this highly profitable market.
Among many investors, there is an opinion that the leverage of a trading account is directly related to the risk of loss of savings: the larger its size, the greater the risk. This is true, but only in part. In order to clearly explain what is leverage on Forex, consider this example. Suppose we have two accounts with the same amount of start-up capital ($ 1,000), but with different parameters: account No. 1 has a leverage of 1: 100, and account No. 2 has 1: 500.
We are 99% sure that EURUSD will grow by 50 points in the near future and want to buy the maximum volume at the rate of 1.2980. On the first account, we can buy 1000 x 100 / 1.2980 = 77041.6 or 0.77 lots. In this case, an increase in the rate of 0.0001 will mean an increase in our capital by 10 x 0.77 = 7.7 dollars (1 point for 1 lot of EURUSD is equal to 10 dollars). If the rate grows to 1.31, we will get (1.31-1.2980) x 10000 x 10 x 0.77 = 924 dollars. Our deposit has increased almost 2 times.
In the second account, the maximum volume will be 1000 x 500 / 1.298 = 385208 units or 3.85 lots. A price increase of 1 point will bring 38.5 dollars, if this deal is closed at a rate of 1.31, then the profit will be (1.31-1.2980) x 10000 x 10 x 3.85 = 4620 dollars. It turns out that the deposit has increased almost five times! Impressive, right?
However, a trader can not always correctly predict the future course movement, and here a large leverage can play a trick - only about 25 points in the opposite direction will almost completely destroy the initial deposit. Indeed, in this case, the losses will be 3.85 x 10 x 25 = 962.5 dollars. In such situations, the broker forcibly closes the losing trade, and no prayers will help to return the lost money.
If you open positions on our two accounts with the same volume (for example, 0.1 lots), then the risk in both cases will be the same, and the leverage will not affect either the amount of profit or the amount of possible loss.
Which conclusion follows from this? Both the large and small leverage have their advantages. A large leverage is useful when participating in contests and is good for scalping, while a small leverage will make trading more comfortable and reduce the risk of large losses. Beginners are usually recommended to use 1: 100 or 1: 200. If you want to trade with the maximum possible leverage, in the case of real trading, when "hard" (hard-earned) money is at stake, never use the maximum amount in operations, otherwise you will soon have to save up money to replenish your account.