Training > What is Leverage?
Understanding the risks involved in leveraged trading is important, as what you don’t know can hurt you. You should consider limiting your leverage to a maximum of 10:1. Trading high leverage is one of the most common errors committed by Forex traders. You can face the risk of losing funds.
For you to understand leverage better, remember that the Leverage ratio depends on the margin required by the broker. For example, if a 1% margin is required, you have 100:1 leverage.
When your leverage is 100:1, to control a $100,000 position, your broker will set aside $1,000 from your account. You’re now controlling $100,000 with $1,000 only. With a small price movement, you can lose a considerable amount of money.
In order to understand the risks involved in leveraged trading, FOREXer has made it mandatory to participate in the Leverage Quiz for Clients who want leverage more than 10:1.
Question 1: What is leverage and how much is the leverage in FOREXer?
Leverage is one of the most attractive feature in the Foreign Exchange Market and most of the beginner and professional traders are interested in leverage. This extraordinary privilege usually cause huge losses to beginners and amateurs in the market and many traders lost their capital because of using high leverage. The maximum Leverage in FOREXer is 1:10 (maximum 10 times of your initial deposit). Leverage allows you to trade maximum 10 times of your deposit. When you want to trade USD 100,000, you should deposit USD 10,000 to FOREXer for covering possible losses. In fact, this is called Margin Account that means you need to deposit 10% of the amount you would like to trader into bank or brokerage firm as a guarantee.
Question 2: Is the leverage actually credit?
No. Leverage is the maximum amount you want to trade and you should deposit 10% to the brokerage firm. If it were credit, you would have be able to withdraw your desired amount from your account, however, you cannot withdraw the leverage amount in the FX market.
Question 3: Who are the participants of Forex Market?
In general, participants and market makers include governments, banks and central banks, financial institutions and individuals and legal entities.
Question 4: Is the leverage bank loans?
No. Leverage cannot be withdrawn whereas the bank loan can be withdrawn.
Question 5: Why FOREXer offers a leverage of 10 to start?
Scientific and practical experience of a decade of FOREXer and assessment of more than 1000 traders over 5 years shows that the traders who uses high leverage (50, 100, 200 etc) loose all their capital within a year. However, traders who uses the maximum leverage of 10, have less chance of loosing their capital and usually more than 75% of these traders successfully make profit in the Forex Market. This truth is a bitter truth for Forex brokers.
Question 6: Why other brokerage firms offer the leverage of 50, 100, 200 or more?
Broker’s income depending on the type of contract with customers directly depends on the volume of the trades, hat is, and the greater the number and the amount of transactions performed by the client, the greater the amount of the commission (spread) of the broker. The more the leverage is provided to the trader, the volume of trades will be increased and the commission received by the broker will be increased also (of course, brokerage income varies depending on how the brokerage risk is managed). This commission is directly deducted from the Trading account of the trader, which is another factor in increasing the losses of traders. Typically, the amateur traders' capital in brokers is traded by the trader himself due to the excessive leverage factor being paid to the commission and paid to the broker. For example, if a trader has $10,000 funds and trades on a 100 times leverage, which means approximately $1,000,000 in each trade, assuming $250 is paid for each $100,000, the trader will pay $250 commission (spread) in each trade. If this trader places 5 trades in a day, the total payable commission will be $1,250 that is 12.5% of the total funds. If the trade uses a leverage of 200 or higher, the cost will be twice or multiple times. It is obvious that the leverage coefficient is only in favor of the brokers and does not have any direct and indirect interest for the trader and the investor.
Question 7: Is it possible to increase the leverage of the trading account upon the request of the traders in FOREXer?
(All new trading accounts is opened with a leverage of 10 only.)
Yes, increase in leverage of the trading account is possible by passing the leverage test successfully.
Question 8: Is the leverage same for all trades? Or does it change in certain circumstances?
When an account is opened with a leverage factor of 10, all transactions will be based on the same factor. We will not change any particular circumstances.
Question 9: How decrease in the leverage affects traders trading?
Research on the reasons that traders are unsuccessful shows that lack of attention to the psychology aspect of traders is one of the main reason in exacerbated losses amount in the market. In other words, in the hight fluctuation moments of the market, keeping mental focus and following the trading rules that is already determined plays an important role in trading success. Since using high leverage enables traders to place orders in multiple times of their initial capital, they will be faced the market fluctuation in multiple times too. In such circumstances, traders physically and mentally experience situations that have never experienced before and due to the unawareness of these experience, most traders starts reacting based on emotions which leads to irreparable losses. Not using high leverages reduces the risk of capital and mentally puts traders into a suitable condition and enables him or her to make reasonable decisions.
Question 10: Who normally uses high leverage (50 to 500) to start trading?
With all the above descriptions and the dangers of using high leverage, below people still use high leverages:
Those who want to become rich overnight.
Those who intend to enter the market for fun and excitement of trading and they care more about excitement rather than profits.
Those who do not care about the money they lose.
Those interested in the luck of profit or loss (randomness, like shooting dice)
Those who do not own their own capital and trade other’s.
Those who do not have knowledge and are not familiar with the Forex market.
Those who want to take revenge on the Forex market or compensate for their previous losses.
Those who have been overcome by greed and the most important thing for them is imaginary profit.
Question 11: How does FOREXer benefit in suggesting 1:10 leverage?
Shareholders of FOREXer always consider durability of their customers and believe in making profit along with their customers in the long run. In simple words, FOREXer expands its global activities with the intention of "win-win".
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