In our last lesson we went over the concept of leverage and how the use of leverage in trading can be used to amplify both gains and losses on ones trading account. In today's lesson we are going to continue our free forex trading course with a look at the mechanics of using leverage in the forex market.
As we discussed in our last lesson many people put down 20% in cash to obtain their mortgage, which puts their leverage at 5 to 1. The 20% down payment that many home buyers put down to obtain their mortgage is the equivalent to the margin that a trader puts up to purchase a financial instrument such as a currency pair when trading on margin.
Most forex trading firms will offer leverage of up to 100 to 1 or more, which requires traders to put up only $1000 in margin for every $100,000 in positions traded. If fully used this would take a 1% move in a currency pair and turn that move into a 100% gain or loss on the value of your account.
The easiest way to understand this is by seeing it in real time by logging into our real time demo trading accounts. If you have not done so already I encourage you to register for a free demo using the link above this video if you are watching on InformedTrades.com or to the right of this video if you are watching on Youtube.
Once logged into the platform, in the upper right hand corner of the platform you should see a window that says "Accounts". In this window from right to left you should see the following columns:
1. The Accounts Column: This lists your account number and if you were trading multiple accounts the other accounts you were trading would be listed here as well.
2. The Balance Column: This lists the amount of money in your account not including any profit or loss on open positions.
3. The Equity Column: This lists the amount of money in your account including any profit or loss on open positions.
4. Day P/L: This is the gain or loss on any open positions for the trading day which begins and ends at 5pm Eastern Standard Time on this particular platform.
4. The Usd Mr Column: This stands for Used Margin and is the amount of money in your account which has been allocated for margining your open positions. If you have no open positions this column will read zero so go ahead and click on the dealing rates window and open a 1 contract position. If you have multiple positions open go ahead and close out the additional positions by clicking on the close rate in the close column beside those positions so that you have only 1 position open.
Once you do this you should see the amount in the Usd Margin column at $1000. If you remember from our previous lessons we are trading a contract size of 100,000 of the base currency, which puts the leverage which has been extended to us on this particular demo account at exactly 100 to 1 for currency pairs in which the US Dollar is the base currency and somewhere near 100 to 1 for currency pairs in which it is not.
5. In the next column over you should see a column that says Usbl Mr. This is the amount of money that you have in your account including any profit or loss on open positions, that is over and above the money allocated to margin any open positions in the account.
Another way of looking at this is that the Usable Margin Column is the Equity Column minus the used margin Column.
If the number in this column drops to zero then the trading platform will automatically generate a margin call and close the open positions on your account. With this in mind, it is important to always have a clear understanding of how much money you need in your account to open each new position so you do not over leverage yourself or worse end up in a margin call situation.
We are going to get into more in depth examples in our next lesson but to quickly demonstrate the relationship between the used margin and usable margin columns lets left click in the dealing rates window and open a 2 lot position of EUR/USD, which will bring the total in our account to 3 open contracts.
Once that position is open the number in your Used Margin column should have gone up by $2000 to account for the two additional contracts we just opened, and the amount in the usable margin column should have gone down by $2000.
As we discussed in our last lesson, not respecting the amount of leverage offered in the forex market is probably the number 1 reason why many traders not only fail when trying to trade the forex market but loose their entire account balance. While the market is not a volatile market in and of itself, you can turn it into a highly volatile instrument by upping the amount of leverage used, which puts your account balance and therefore trading career at risk.
Thats our lesson for today, in our next lesson we will look at several examples of leverage at work on our forex trading demo accounts so we can start to get a feel for what an appropriate amount of leverage may be so we hope to see you in that lesson.
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John M. Bland, MBA co-founding Partner, Global-View.com
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
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The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
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