Leverage Like Two edge Knives, Beneficial and Adverse

The forex market is a financial market that has the largest leverage in the world. In the equity market, the standard margin is set at 2: 1, which means that the investor must trade at least $ 50 in cash to control stocks worth $ 100. While in the options market, leverage increases to 10: 1, with $ 10 controlling $ 100. futures market, leverage factor increased to 20: 1.

For example, in a Dow Jones mini futures contract, a trader needs only $ 2,500 to control stocks worth $ 50,000. However, none of these markets are close to the leverage intensity that the forex market has. Standard leverage in most forex brokers is set at 100: 1 and can go up to 200: 1. That means only $ 50 can control a currency of $ 10,000. Why is this important? Leverage can be said to have two blades. High levels of leverage can make forex very profitable or very dangerous, depending on which side of the trade you are on.

Retail traders can literally double their accounts overnight or lose them within hours. This can happen if they use the full margin they have, although most professional traders limit their leverage to no more than 10: 1. They almost never bear such a huge risk. The higher the leverage used, the less capital required for forex trading in lot sizes. This becomes one of the advantages of forex trading so that all traders with limited capital can do forex trading.

Leverage is related to the number of lots we use. We recognize the use of lot 0.01 or often referred to as Micro lot, lot 0.1 as Mini lot and lot 1 as Standard lot. In many countries, there are authorities that only allow the use of the smallest Mini lot but there are also authorities that allow the use of the smallest Micro lot. Indonesia is one of the countries that only allow the use of Mini lot.

Let’s assume that the value of 1 point of movement of a pair for 1 standard lot is $ 10 (because not all pairs are equal). Then the value of 1 point for lot 0.1 is $ 1 and the value of 1 point for lot 0.01 is $ 0.1. Well, regardless of the leverage value chosen, the value of 1 point of movement is unchanged. The higher the leverage, the trader can be increasingly hooked using the full lot according to the capacity of the capital owned. That way, the trader will be exposed to the great risk of losing all his funds due to losing trades. But regardless of whether they are trading with 200: 1 leverage or 2: 1 leverage, almost all traders make forex trading using anticipated Stop Loss.

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