Lesson 4: How To Trade With Leverage
If you were to trade in small quantities, for example, 1 Euro at a time, you
would never make any profit. That’s why, in the Forex, market currencies come in
Lots; 1000 units form 1 micro lot, 10,000 units will form 1 mini lot and 100,000 units
will form 1 standard lot.
Right now you are probably thinking: “I don’t have that kind of money. Does
that mean I should not be trading?” This is where leverage comes in. Forex brokers
offer up to 500 to 1 leverage. That means that to open one standard lot large(long?)
position you need only to have about 300 dollars in your account.
The exchange rate for the Euro/Dollar is 1.300. You have your margin set at
0.2%. You decide to buy 1 standard lot, so you are buying 100.000 euros which is
worth 130.000 dollars. As your current margin is 0.2%, your broker sets aside $260
from your account
While this is considered to be a down payment, you will have to borrow the
rest of the money to open a position. Of course, after you close your position the
money is returned to you along with your profit or your loss for this particular trade.
Just remember; high leverage means you are also susceptible to large losses as well