In our last lesson we looked at some of the logistics of leverage on our real time demo trading accounts. In today's lesson we are going to continue our leverage discussion with a look at several examples of trades using leverage and the amplification of potential risk and reward that comes with that.
As we covered in our last lesson the real time demo trading platform which we are using, comes with a default leverage maximum of 100 to 1. What this means is that for every contract of 100,000 of the base currency that you open, you need at least $1000 of margin in your account to avoid receiving a margin call and having that trade closed.
The important thing to understand here is that this 100 to 1 leverage is the maximum offered on this particular demo account and the level at which if you drop below the open positions on your account will be closed. With this in mind it is my opinion (which was formulated from years of trading and watching other people trade) that most successful traders would never put themselves in a position where they would receive a margin call. The reason behind this is that they employ a money management strategy which controls the amount of leverage that they would use on any one trade, and for their account as a whole, something which we talk in depth about in Module 6 of our free beginner trading course in the free course section of the InformedTrades.com site.
In general most successful traders I have seen trade use a maximum leverage at any one time of 5 to 1 and many would consider even this to be too highly leveraged. The amount of leverage used really depends on trading style as much as anything as in general traders who hold positions for short periods of time and cut losses quickly are able to successfully employ higher amounts of leverage than longer term traders who need more breathing room in their trades. To help illustrate how this works from a logistical standpoint lets take a look at a couple of examples:
The best way in my opinion to think about leverage and trading on margin is to always ask yourself the question of: "By how much am I amplifying the gain or loss on my account when opening this trade?"
For this example lets say that I start trading with $100,000 simply because this is an easy round number to work through the math with.
If I open 1 contract of USD/JPY then I am trading $100,000 against the equivalent amount of JPY as we have learned in previous lessons. So if I have $100,000 in my account and I am trading $100,000 USD against JPY, then I am not leveraged as the cash balance of my account equals the position size I am trading.
With this example a 1% movement in the currency pair would represent a 1% gain or loss in the value of my account. As we learned in our last lesson the Used margin column of my account in this example would show $1000 and my Usable margin would show $99,000.
If I open 2 contracts of USD/JPY then I am trading $200,000 against the equivalent amount of JPY. As I have $100,000 in my account and $200,000 in open positions I am leveraged at 2 to 1 as the position size I am trading is twice the value of the cash in my account.
With this example a 1% move in USD/JPY currency pair would represent a 2% gain or loss in the value of my account, thus amplifying the potential gain or loss on this trade by 2 times. In this example the Used Margin Column of my account would show $2000 and my usable margin would show $98,000.
If I open 5 contracts of USD/JPY then I am trading $500,000 against the equivalent amount of JPY. As I have $100,000 in my account and $500,000 in open positions I am leveraged at 5 to 1.
With this example a 1% move in the USD/JPY currency pair would represent a 5% gain or loss on the value of my account, thus magnifying the potential gain or loss by 5 times.
For tonights homework session I recommend working through a couple of examples as I have above with other currency pairs in which the USD is the base currency in the pair. Secondly I encourage you to think about how to go about figuring out the leverage used when the USD is not the base currency in the pair.
This will be the topic of our next lesson so we hope to see you then.
Elevate Your Trading With The Amazing Trader!
The Amazing Trader includes:
Actionable trading levels delivered to YOUR charts in real-time.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
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.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.