leverage - broker loses?

[oysterblue]

Hi .. I'm a newbie to forex trading.

I've built up some confidence on demo accounts and now like to go live, but there's one burning issue I'd like to resolve before I commit.

If I place an order to buy for a few dollars, and the broker leverages that up, how come when I make a loss he doesn't take a gigantic hit that he'd like to reclaim from me? !!

Please could someone explain so that I can rest easy

 

[Jack o'Clubs]

If I place an order to buy for a few dollars, and the broker leverages that up, how come when I make a loss he doesn't take a gigantic hit that he'd like to reclaim from me? !!

He does reclaim it from you. Leverage is a two-way street. You can win big, and you can lose big.

 

[oysterblue]

For clarity, can I put some nos on this ..

10USD buys me 1000USD at 100:1?

My BUY trade achieves 15 pips profit which makes me 140USD ?(excluding spread),
but the broker USD14,000?

Equally, if I lost 15 pips on that trade does the broker lose USD14,000?

Doesn't he then want his USD14,000 loss back from me?

 

[Jack o'Clubs]

No, it doesn't work quite like that.

Using your figures: the leverage is effectively a loan to you. So your $10 is 'downpayment' on a $1000 position (using your numbers and using technically incorrect but simple terminology). Your 15pip profit is equivalent to $140, which is your profit on the $1000 you've been 'lent', not your $10. Or, if you lose, you'll owe him the $1000 back that you've 'borrowed' less the $140 that you've lost. The broker isn't making or losing $14,000 each time, just $140. You will also be required to leave a deposit ("margin") with the broker to cover the possible loss. So to trade your $10 position, he'll probably want a few hundred bucks to make sure there are no 'issues' with you settling up when you're the wrong side of a trade. Clearer?

 

[jiggly]

unless your orders are being executed in the real market, your broker technically doesn't lend you anything. it is all hypothetical.