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What is Leverage in Forex Trading ? Leverage Explained (2020) - YouTube
Channel: Forex Monopoly
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Wondered how traders make around 1000 dollar
by trading a 100 dollar account or how they
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loose their account in a single trade?
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Well, leverage is the key to that and in this
video I'll explain to you what is leverage
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and how to use it?
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So, before we move forward make sure you subscribe
to this channel and don't forget to hit the
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notification bell.
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Leverage is nothing but the money that the
trader borrows from his broker to increase
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his profit potential.
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So, let us try to understand this with the
help of an example.
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Let us consider, you funded your trading account
with 1000 dollar and your broker provides
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you no leverage.
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So, you have to trade with leverage of 1:1.
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This means that with a 1000 dollar account
you can buy or sell only 1000 units of any
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currency pair.
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Now let's say that you bought 1000 units in
USD/JPY that mean you use a lot size of 0.01.
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If you don't know what lot size is, I have
added a video for that on my channel.
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You can check it out.
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Moving forward let's consider you bought 1000
units in USD/JPY at the price 110.000 and
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then the price moved to 111.000
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This means that the price moved 100%.
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This means that you had a profit of 10 dollars
i.e. 1% of your account.
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Now let us consider that you had the leverage
of 1:10.
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This means that your broker allows you to
use 10 times of your account.
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So your broker lets you control a 10,000 dollar
account with a account of only 1000 dollar.
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So you now bought 10,000 units in USD/JPY
at 110.000 and then the price moved to 111.000
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This is a movement of 100 pips.
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So now with leverage of 1:10 you made a profit
of 100 dollar.
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This is 10% of your account.
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So in simple terms leverage means borrownig
from your broker.
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So for the 1000 dollar account, the leverage
of 1:10 gives you 10 time more money i.e.
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10,000 dollars
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and allows you to buy and sell 10,000 units
of any currency.
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So, if your leverage is 1:100 it gives you
100 times more money i.e. 100 times of 1000
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dollar is 100,000 dollar.
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So, it allows you to buy or sell 100,000 units
of any currency or use a lot size of maximum
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1.0.
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Now you may be wondering why does your broker
let you borrow the money and how can it benefit
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the broker?
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Well, there is very simple answer to it.
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Your broker earns money when you trade more
and therefore your broker wants you to trade
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more.
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Plus the broker keeps your initial deposit
aside and as soon as your trading account
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is in lose nearing your initial account balance
all of your trades are closed.
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For example, let us say, that you had a leverage
of 1:100 on your 1000 dollar account and you
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entered a buy trade on USD/JPY at 110.000
with a lot size of 1.0
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that is you bought around 100,000 units and
then the price moved to 109.000
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This means that you had a lose of 100%.
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So now as your account was in lose of 100,000
dollar your account will get flushed i.e.
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all your trades will be closed with a loss
of 1000 dollar
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making you loose 100% of your account on a
single trade.
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You can clearly see leverage is a double edge
sword i.e. it can double your account in a
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trade.
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But it can also make you loose your account
in a single trade.
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So, always choose proper leverage while trading.
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What is the perfect leverage or which leverage
you should use?
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I personally use the leverage of 1:50 for
my big size accounts and 1:250 for my small
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size or challenge accounts.
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Professionals mostly use the leverage of 1:10
to 1:50 as their account size is big to let
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them use that leverage.
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For someone who is new to forex and wants
to try trading real account with small investments
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as low as 50 dollars
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he can use a leverage of 1:100.
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Because with the account size of 50 dollars
you cannot use the leverage of 1:10.
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You won't even allowed to open a trade with
that leverage.
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So, for accounts from 50 dollar to 5000 dollar,
the leverage of 1:100 is appropriate.
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For accounts from 5000 dollar to 10,000 or
more, you can use the leverage of 1:50.
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Just make sure you use a stop lose and don't
risk more than 3 to 5 % on a single trade.
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That's all for this video.
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Thank you.
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