Let’s Learn About Forex Leverage
In recent years, forex has become one type of trading that is a favorite of many people. Countless people have tried to invest in forex trading. But unfortunately some beginner traders are often confused with some terms in forex. One term that is often heard but still confusing is leverage. That’s why let’s discuss leverage in forex here.
Definition of Leverage in Forex
So what is forex leverage? Leverage can sometimes be called margin in forex trading. In essence, leverage means you use a small deposit for greater results in the forex market. So you will be able to reap considerable profits when the market conditions are in accordance with your wishes. You can do this by making a small deposit. But on the other hand you have to be careful about the negative effects of leverage. This is because in line with the possibility of getting a lot of profit, you will also suffer huge losses when the market moves against you. In conclusion, leverage is indeed worrying in terms of risk of loss but it also promises great profits.
Leverage system in Forex
Leverage is usually done with a ratio system. The ratio itself is usually set before trading. The majority of people will use the 50: 1 ratio for a 2% margin. Then what is the meaning of the 50: 1 ratio? This means you have the opportunity to reap 50 dollars per 1 dollar in your account. However, you must pay attention to the margin numbers as well. 2% margin is a condition for trading. This means you must have 2% of the desired trading number in your account.
All About Margin Close Out
In forex trading there is also a risk management system that we commonly know as “margin close out”. Close-out margin is basically a safe limit when the forex trading market hits your account. When you trade forex the fact that the money you use is brokerage money. Of course they don’t want to lose money. Therefore, to prevent this bad thing from happening they will advise you to do a margin close out.
Close-out margin will help save your account before the loss approaches. Then you will close the account in the best price scenario. By doing this you will not lose too much money (your own money or brokerage money). But you also still have to remember that even if you use a margin close out, you will still lose a lot of money. At least the worst scenario of margin close out will lose about 50% of your total account.
Forex Leverage Pros and Cons
As you already know, basically leverage is borrowing someone else’s capital to get you to reach a higher position in the market. By having a higher position, you can make more profits. With a 50: 1 ratio, in short you will produce 50x more. So the advantage of leverage is that you can make more money.
Now for the negative side of the leverage itself is actually in harmony with what is on the positive side. With the possibility of earning a profit of 50x more per $ 1 you have then you can also lose 50x more money per $ 1. So the possibility of losing money is as much as the profit you might get.
Fortunately at this time each broker has a margin close out policy, where this policy not only protects you but also protects the broker himself who lends you money.