Forex Leverage

What is Leverage in Forex Trading?
Forex traders conduct trades in one of three types of Forex trading accounts – a standard account, a mini account, or a micro account. A micro account allows the Forex trader to trade in the smallest of lot sizes, generally 1000 units of the base currency. The next step up is the mini account, which allows trades in lot sizes of 10,000 units of the base currency. The standard Forex account allows trades in 100,000 units of the base currency, and is the level at which you’ll find all professional Forex traders.

The nice thing about having three levels of investment minimums is that it allows new Forex investors to get their foot in the door without having large amounts of investment capital before they can get started. Micro accounts allow traders to deposit as little as $250, and due to the power of leverage, lets the Forex trader control sums of currency many times larger than their investment capital.

Although Forex leverage provides investors with a method of generating healthy profits it can also be responsible for the new Forex investor losing his or her capital very quickly. The primary reason new Forex traders fail is that they’re undercapitalized for the type of account they’ve opened. Professional traders understand this, and this is why they make sure they have far more investment capital to deposit in their Forex account than the required minimum.

Leverage’s constant companion is the margin. Margin basically describes the amount of money in your account that you can use to conduct trades. The amount of usable margin you have to play with is dictated by the amount of equity you have in your account: take the equity in your account and subtract the amount of margin that you’ve used and you’ve got your usable margin.

If the equity in your account ever drops below the amount of used margin then a margin call is generated. A margin call is when the broker cashes in enough of your position to cover the drop in equity. As an example imagine that you have $10,000 in your account, giving you $10,000 in usable margin. You buy $7000 worth of lots, giving you $3000 remaining in usable margin. If the value of your investment drops just a few pips (which can easily occur in a matter of hours or minutes in some cases) your equity can drop from $10,000 to $7000 quite quickly. At this point the margin call is triggered and you lose $3000 to cover your margin. Before you know what has happened you’ve lost 30% of your investment capital.

The power of Forex leverage can be seen in the above example. The ability to control $100,000 worth of currency with $1000 can catapult the savvy Forex investor into the next tax bracket, but only if they manage their margins wisely.

The Forex market can be a very volatile place, and those that don’t understand the concept of margins will quickly fall victim to it. Those that understand this reality are far better equipped to succeed in the Forex market than those who jump in unprepared.




Forex Hoster - MetaTrader And Expert Advisor Forex Vps Hosting. Secure Forex Vps MetaTrader & Expert Advisor Hosting For Forex Mt4 Traders. We Support Windows, Mac Osx And Linux. Click Here!

Forex Candlesticks Made Easy! Click Here!

Forex Massacre. Brand New Site From Forex Trading Manuals! Click Here!

Money Beyond Belief By Dr. Joe Vitale And Brad Yates. Joe Vitale - Brad Yates - Teleseminar Recordings Helping Participants Achieve Money Freedom - Freedom From Limiting Financial Beliefs Using Eft Click Here!

Everything You Know Is Wrong! About Being Debt Free That Is!! And It Will Keep You In Debt The Rest Of Your Life! Click Here!

Credit Repair Secrets Revealed! Click Here!

Currency Exchange Cash. Proven Way To Generate Profits. Click Here!

5 EMAs Forex Trading System. No Lies, No Bs! Real Money, Live Account Statements Prove Over 96% Click Here!

Forex Online Trading Software

Almost every online Forex broker has a software package for their clients to make transactions and get information about market prices. Due to the relative maturity of online trading there is a consensus among Forex brokers about what clients need in terms of software tools. There are two main classes of Forex software – web based and client based.

All Forex trading software needs to provide up-to-the-second market information. The fast moving pace of the Forex demands real-time data delivery for making decisions about when to enter and exit the market. Forex dealers claim their software performs well with a minimum of delay, but in fact there can be a number of factors that could delay data transmission.

Internet connection speed and distance from the broker's servers are the two main factors that can slow down data transmission. Forex traders should have a reasonably modern computer and a high speed Internet connection to take full advantage of the Forex software offered by their broker. It may also pay to choose a broker in the same area as you live. Traders in Bangkok who deal with brokers in Ohio may experience delays – especially during volatile market conditions.

Web Based or Client Based?

Web based Forex trading software is on the broker's website – you don't have to install any software on your computer. Client based software requires you to download and install the software package used by your broker. Which is better? More and more brokers are offering web based client software for reasons of convenience, safety and reliability. Web based software allows you to log on to your account from any computer – you can make trades from any location that has an Internet connection. Client based software, on the other hand, restricts you to making trades from just one computer.

Besides the convenience, web based software offers greater security. Data is secured with high-strength encryption making it impossible for outside parties to access during transmission. Client based software is also secured during transmission but there are more possibilities for data loss from the trader's computer. Viruses and hackers may be able to access valuable financial data stored in a home or office computer.

Forex Trading Software Features
Forex software needs to access real-time quotes and offer a means to enter and exit the market. Even the most basic packages offer these functions. Current quotes can be seen for most currency pairs and the software allows you to buy or sell at market prices or enter and exit the market using stops or limits. Ideally, trading software should have integrated charting functions with a variety of viewing functions.

Basic Forex software packages should be offered free of charge, but many brokers also have more advanced packages available for a monthly fee. Some of the features you could expect to see in advanced software include the ability to trade directly from the chart and full analytical functions.

Forex Software Technology
The backbone of Forex trading software Technology is a series of data servers that allow you to connect to your broker's web site and make transactions. Servers operated by the Forex broker need to be reliable and secure for maintaining data integrity and assuring accurate transaction processing. Servers are subject to power outages and natural disasters, so to ensure maximum uptime, the broker should operate at least two sets of servers in separate locations. Brokers should also offer regular data backups to guarantee the integrity of their customer's financial data in case of server failure.




Forex Hoster - MetaTrader And Expert Advisor Forex Vps Hosting. Secure Forex Vps MetaTrader & Expert Advisor Hosting For Forex Mt4 Traders. We Support Windows, Mac Osx And Linux. Click Here!

Forex Candlesticks Made Easy! Click Here!

Forex Massacre. Brand New Site From Forex Trading Manuals! Click Here!

Money Beyond Belief By Dr. Joe Vitale And Brad Yates. Joe Vitale - Brad Yates - Teleseminar Recordings Helping Participants Achieve Money Freedom - Freedom From Limiting Financial Beliefs Using Eft Click Here!

Everything You Know Is Wrong! About Being Debt Free That Is!! And It Will Keep You In Debt The Rest Of Your Life! Click Here!

Credit Repair Secrets Revealed! Click Here!

Currency Exchange Cash. Proven Way To Generate Profits. Click Here!

5 EMAs Forex Trading System. No Lies, No Bs! Real Money, Live Account Statements Prove Over 96% Click Here!

Trading Currencies on Margin

The key to Forex popularity is margin. Without margin, the Forex would be beyond the reach of the average investor. So, what exactly is margin and how does it work?

Margin accounts allow Forex traders to control large amounts of currency with a relatively small deposit. Establishing a margin account with a Forex broker enables you to borrow money from the broker to control currency lots which are usually worth $100,000. The amount of borrowing power your margin account gives you is the leverage. Leverage is usually expressed as a ratio – a leverage of 100:1 means you can control assets worth 100 times your deposit.

What this means in Forex is that with a 1% margin account you can control standard lots of $100,000 with a $1,000 deposit. Trading on margin increases both profits and losses, and the potential exists for the trader to lose more than his original deposit. With proper safeguards, however, loss can be limited, and usually brokers will terminate a transaction that extends beyond the margin deposit.

Benefits

As we mentioned above, trading on margin gives you more buying power and the potential for more profits (and losses). How does this work, exactly? A 1% margin account allows you to control a currency lot of $100,000 for $1,000. When dealing with $100,000 small changes in the price of the currency can result in large profits or losses.

Forex currencies are traded in much smaller units than cash. The American dollar, for example, is traded in units down to 4 decimal places. Instead of $1.32 Forex quotes are seen as $1.3256. The smallest unit in FOREX currencies is called the pip, and when you have a $100,000 each pip of your total lot is worth $10 (when trading American dollars).

If the price of American dollars changes from 1.3256 to 1.3356, that's a difference of 100 pips which represents a profit or loss of $1000. Without margin, if you had $1000 of currency, the price change from 1.3256 to 1.3356 represents a difference of $10. Significant to the tourist, perhaps, but not the investor.

So the benefit of margin is increased profit potential.

Risks

As there is increased profit potential, there is also increased loss potential. If you are not careful, your entire margin account could quickly be wiped out. If your margin account is 1% and the currency moves just one cent against you, you lose $1000.

Forex trading, however, has several methods to limit loss. Stop loss orders automatically close your position if the value of the currency crosses a pre-determined point. Stop loss orders allow you to limit your losses to a specified amount while still allowing potential profit taking.

An often overlooked risk is the possibility that your broker may close your position if your potential losses approach the balance of your margin account. You may be riding out a down trend with the expectations of a market reversal, but unless you replenish your margin account you may find your position has been closed. If this happens, you lose all of your margin.

Example 1:

You sell EUR/USD at 1.2144 (sell 100,000 euros and buy 121,440 US dollars) with the expectation that the euro will fall in price. You have a 1% margin account which means the required margin is $1,214.40. You have $1250 in your margin account, so to enter this position your margin account is left with $35.60.

You have not specified a stop loss order, and after you enter this position the euro suddenly rallies, gaining 0.0263 for a price of 1.2407. 100,000 euros are now worth US$124,070 and your 1% margin requirements have risen to $1,240.70. Depending on the policy of your broker, your position may be automatically closed or the extra funds in your margin account may be used to make up the difference. In any case, if the euro continues to gain value and you wish to ride it out (bad idea) you will have to add more funds to your margin account or risk losing everything.

Example 2:

You buy USD/CHF at 1.2623 with the expectation that the US dollar will gain against the Swiss franc. You buy a standard lot of 100,000 American dollars for 126,230 Swiss francs with a margin requirement of 1% or $1,000.

As expected, the US dollar rises to 1.2683 at which point you close your position. You sell 100,000 American dollars for 126,830 Swiss francs for a profit of 600 francs or US$473.08 (600 francs divided by the exchange rate of 1.2683).




Forex Hoster - MetaTrader And Expert Advisor Forex Vps Hosting. Secure Forex Vps MetaTrader & Expert Advisor Hosting For Forex Mt4 Traders. We Support Windows, Mac Osx And Linux. Click Here!

Forex Candlesticks Made Easy! Click Here!

Forex Massacre. Brand New Site From Forex Trading Manuals! Click Here!

Money Beyond Belief By Dr. Joe Vitale And Brad Yates. Joe Vitale - Brad Yates - Teleseminar Recordings Helping Participants Achieve Money Freedom - Freedom From Limiting Financial Beliefs Using Eft Click Here!

Everything You Know Is Wrong! About Being Debt Free That Is!! And It Will Keep You In Debt The Rest Of Your Life! Click Here!

Credit Repair Secrets Revealed! Click Here!

Currency Exchange Cash. Proven Way To Generate Profits. Click Here!

5 EMAs Forex Trading System. No Lies, No Bs! Real Money, Live Account Statements Prove Over 96% Click Here!

How to read Forex Quotes

Currency prices are determined by a number of factors, the most important of which are economic and political conditions in the issuing country. Political stability, inflation, and interest rates are all factored into the price of any currency. In addition, governments can try to control the price of their currency by either flooding the market (to lower the price) or buying extensively (to raise the price).

Because of the immense volume of Forex, however, it is impossible for one force to control the market for any length of time. Market forces will prevail in the long run, making FOREX one of the most open and fair investment opportunities available.

Each world currency is given a three letter code which is used in Forex quotes. The most common currencies are USD (US dollars), EUR (European euros), GBP (United Kingdom pounds), AUD (Australian dollars), JPY (Japanese yen), CHF (Swiss francs) and CAD (Canadian dollars).

Prices of foreign exchange are indicated by FOREX quotes in pairs of currencies. The first currency is the 'base' and the second is the 'quote' currency. In this example:

USD/EUR = 0.8419

...the currency pair is US dollars and European euros. The base currency (USD) is always at '1' and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar costs 0.8419 euros.

Conversely...

EUR/USD = 1.1882

...tells us that it costs 1.1882 US dollars to buy 1 euro.

When the price of the quote currency goes up it indicates that the base currency is becoming stronger – one unit of the base currency will buy more of the quote currency. If the quote currency falls, however, the base currency is becoming weaker.

Forex quotes are seen in 'bid' and 'ask' prices. Bid is the price that buyers will pay for the base currency (while selling the quote currency), and ask is the price that sellers will sell the base currency (while buying the quote currency).

Symbol Bid Ask
USD/CAD 1.2392 1.2397

This chart tells us that we can buy one American dollar for 1.2397 Canadian dollars, or sell one American dollar for 1.2392 Canadian dollars. The most commonly traded currencies pairs are the 'Majors' – GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.

We often see exchange rates listed in cross currency charts that list many different currencies and their values against each other. An example of such a chart is seen here:

US $ Ca $ Euro UK £
US $ 1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK £ 1.75840 2.18147 1.47591 1.00000

In this chart, the currencies listed down the left side of the chart are the base currencies and the currencies at the top are the quote currencies. We can convert the chart above into currency pairs by following the row beside the base currency. Using US dollars as the base currency we get the following currency pairs:

USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870

...which tells us that one US dollar is equal to the corresponding value of the quote currency. To find the opposite pair e.g. CAD/USD follow the Canadian dollar row to the US dollar column - CAD/USD = 0.80606 (one Canadian dollar is worth 0.80606 US dollars).

There is no standard for cross-currency charts – some have the base currency on the top and some have it on the side. How to tell which is which? You need to know at least one pair of currencies and which one of the pair is more valuable.




Forex Hoster - MetaTrader And Expert Advisor Forex Vps Hosting. Secure Forex Vps MetaTrader & Expert Advisor Hosting For Forex Mt4 Traders. We Support Windows, Mac Osx And Linux. Click Here!

Forex Candlesticks Made Easy! Click Here!

Forex Massacre. Brand New Site From Forex Trading Manuals! Click Here!

Money Beyond Belief By Dr. Joe Vitale And Brad Yates. Joe Vitale - Brad Yates - Teleseminar Recordings Helping Participants Achieve Money Freedom - Freedom From Limiting Financial Beliefs Using Eft Click Here!

Everything You Know Is Wrong! About Being Debt Free That Is!! And It Will Keep You In Debt The Rest Of Your Life! Click Here!

Credit Repair Secrets Revealed! Click Here!

Currency Exchange Cash. Proven Way To Generate Profits. Click Here!

5 EMAs Forex Trading System. No Lies, No Bs! Real Money, Live Account Statements Prove Over 96% Click Here!