Leverage in Forex - from enemy to friend

Critics FOREX (from FOReign EXchange) with enviable regularity attribute the considerable leverage practiced in this market to one of the most significant risks inherent in currency transactions with this instrument. However, this truth is half-truth. In fact, leverage 1:100 (and sometimes more) is a great blessing. It's just that in order to extract it, you have to handle it wisely.

Leverage alone does not increase risk. Risks, of course, do arise. As in any other trading transaction with an unknown result. But in order to judge the level of risk, one should first ask what is the size of the "safety cushion", the role of which is performed by so-called reserves. This is a key indicator of risk of a trading position. And not what kind of leverage your broker allows you to have.

How does leverage work on ?

Now let's see how it all looks like in reality. You can make a trade in FOREX by opening it to change the rate of 1,000 units of some currency (against another, of course) and using only 10 units of the base currency to do it-that is moderate risk. But if you, for example, open a position involving the entire deposit, then of course, the profits and losses in your account will grow at an incredible rate. Accordingly, the risk in this case will be high. However, the same as the size of the profit for which the transaction is considered. Of course, in this case there is no way to avoid "too risky market".

However, if you open a position with part of your existing deposit, you will get a very different picture. Let's say, if you have $200 on your account, you would not open a position for $200 (where with a leverage of 1:100 one pip on the Euro is worth 2$) but for $10. In this case, in terms of pips, you would not have a "cushion" of 100 pips, but of 2,000 points. In this case your risk will be disproportionately lower. This rule will be observed as long as you do not take active actions to open new positions without closing the previous ones. If a taboo is placed on the use of funds that are not actively used in trading, then they can be referred to as real reserves. Because in this case the money becomes the means to cover possible losses on open positions. Also, these reserves can be called "safety cushion", designed to protect your position from forced closure due to lack of funds in the account. In our example, such a "cushion" is 2 000 pips. With an average stop loss of 100 pips, a deposit of 200$ would be enough for 20 negative trades in a row. But since the number of positive trades is slightly greater than the number of negative ones, the deposit will slowly but surely grow and the profits will increase with competent analysis and market entry.

So it turns out that by regulating the amount of reserves (unused funds), we have the flexibility to risk management. In fact, he is almost completely dependent on decisions related to determining the level of reserves. The larger they are, the lower the risk, and vice versa. Therefore, if we focus on solving this very problem, we automatically have at our disposal a unique financial product: an instrument with a floating risk, which can be changed almost unlimitedly. From minimally possible, which size is set depending on our understanding of the acceptable risk/profit ratio, to threateningly large risk, which critics of the FOREX market are tirelessly telling us about.

It must be said that in the latter case we actually have at our disposal natural option. Because when working with an indivisible deposit, the yield curve has a lower boundary (loss) in the amount of funds in the account. While the upper bar (potential income) is limited only by the strength of the trend being traded. By the way, many traders intuitively understood this a long time ago. For this reason they do not consider it necessary to keep all their capital on the trading account, and prefer to top it up if necessary, or even to open a new account. We have to admit that from this point of view this approach has as much right to live as any other money management method.

In this regard, it may be noted that we get something similar if we go to the stock exchange, where the trades are futuresFor that we will use the services of conventional stockbrokers. However, you won't find such a wide range of leverage options with them. There are no products on exchanges that are traded as 1 to 100. In addition, exchanges lately have been resorting to changing margin requirements more and more often, which happens quite unexpectedly. And of course, not at the most appropriate moment. And exchanges often do not have the liquidity that is inherent to OTC markets, such as FOREX, for example.

There is no need to be afraid. leverageIt's important to use it properly. In our example we have seen in detail how, when the trading volume (lot) changes, the leverage turns from an enemy into a real friend. In the complete absence of leverage an average citizen would simply have no opportunity to learn how to work and earn in the FOREX market, because the minimum traded volume on it is 10,000$, while the deposit must be at least 200,000$ to provide the minimum "cushion". Leverage of 1:100 with FOREX CLUB gives you an opportunity to join the traders' community having only 200$, but with the risk comparable with the trading at FOREX market with the standard lot 10 000$ and account 200 000$.