leverage - forex

[expensif]

I'm a bit confused on trading FOREX with leverage.

If i trade with a leverage of say 100:1, i would trade $100,000 worth with only $1000, right?
Does this in turn mean that one tick up (or down!) would give me 100 times more profit (or loss!)?

Is my position stopped out if my trade goes against me when the loss amounts to the $1000 i invested
(in order to control the $100,000?

Or does the margin continuously change with the price of the forex, and then gets stopped out
when my account is empty? Or can it get even worse?


I could still use limit orders and stop loss in order to reduce risk?

 

[gelbehimmel]

From what I understand
1. Yes if your leverage is 100:1 then yes you would trade 100,000$ from one lot which would be 1k, or 200,000$ if your leverage was 200:1. And yes then you are multiplying your profits or losses by a larger amount. However you have to remember the currencies are moving in small amounts like 1.91921 to 1.91932 so even though that changes can move quickly and you can loose a lot of money quickly you will not be loosing thousands on a single lot. I hope this helps you understand how that works better.

2. Depending on your broker from what I understand they will automatically lock out your trades if you are at 0$ dollars while some you can actually loose more then you have.

3. Yes your maring call adjusts with the price of your open trades. For instance if you need to cover your trades with equal amounts and you have one lot open of 1k and you have 1.5k after that in your account then if you lost more then 500$ your margin call would happen because you would have lost 500 dollars therefore are requiring more money then you have to back your open position.

4. Yes you can use limit orders and stop losses or OCOs to help prevent risk.

I hope this helps and I hope my information is acurate. Please correct me if I am wrong.

 

[Rhody Trader]

Because of the automatic position closure that most forex brokers execute when you have a margin call, you will never really be in a position to lose everything on a single trade (confirm your particular broker's policies on that, though).

What gelbehimmel says on margin adjusting is a bit off, though. Your margin requirement at any point is based on the value of the position(s) you have open. You will get a margin call if you account equity falls below that threshold %. That's usually 50% of your initial margin amount (which comes from your leverage ratio, so 1% in the case of 100:1), but confirm that with your broker. That means if you put on a position requiring your whole $1000 be used as margin, then the margin call would come if you lost more than $500 on the trade. In gelbehimmel's example it seems as though if your position went in your favor by $500 then fell back to break-even you would get a margin call, but that's not the case at all.

 

[gelbehimmel]

If I am understanding this correctly then your margin calls are based on percentages from your entire account equity including the money in your open trade?

 

[Rhody Trader]

The Oanda site provides some very good explanations on margin and margin calls with examples. You'll want to confirm specific details with your own broker, though.

 

[verbum4it]

Finally, I understand about the leverage in trading Forex. I will search in many source to extend my understanding about leverage. I hope the members of this forum will help me to give me a good source to get. I want to understand well about this because I want to explain it to my friends who aske me about what is leverage in Forex trading

 

[FXGroundworks]

Lets first define leverage. There are two types of leverage that you must be aware about. One is position leverage and the other is margin leverage. Do not get confused about the two of them. Your broker will advertise position leverage which is the 500:1 etc. With just 1 dollar you can trade up to 500 dollars in value. People tend to look at this as something positive because you can build money quickly. What they do not realize is you can lose it just as quick. Your broker will never let your account fall into a negative (or owing) status… and yes I would highly recommend you use limit orders and stop loss orders to reduce risk. Just note that most brokers can hold orders for up to a minute before executing them based on their discursion and during news that can be a very scary thing.