As you know, the term leverage is also known in the world of forex trading. Leverage in forex refers to the ratio of the number between the trader's own funds and the borrowed funds obtained by the trader from the broker. This leverage is what allows forex traders to trade currencies with small capital.

Some experts suggest using this leverage only for market conditions that have a high chance of giving a trader profit. Therefore, a trader must know forex leverage in order to optimize profit loss sharing when trading forex.

The Concept of Leverage in Forex Trading

The main concept of leverage as mentioned above is to increase the potential of a trader to get more profit by taking loan funds from the broker itself. When using high leverage, the lower the capital requirements that must be deposited by a trader in a trading account on the broker's forex platform.

A simple example, if you want to trade for 1 lot worth 100,000 US Dollars, you don't have to deposit the same amount of money or capital. If the broker you use has a leverage option at a ratio of 1:100, it means you only need to deposit 1,000 US Dollars to trade 1 lot.

With the concept above, this means that forex leverage can also increase purchasing power. Taking a leverage of 1:100 by depositing a deposit of 200 US dollars can allow you to trade with a nominal value of 20,000 US dollars. You also need to know that additional funds in this leverage option cannot be cashed out, they can only be used for trading.

However, you cannot see this leverage concept from its profitable side only. Leverage can also turn into a loss for you if you are not careful when trading. For example, the previous example. With a deposit capital of 200 US dollars and leverage of 1:100, you can trade with a capital of 20,000 US dollars.

If you then experience a loss of 10,000 US dollars, novice traders often forget that the remaining capital is no longer 10,000 US dollars but 10 US dollars. Plus the loss that exceeds the value of the loss is 50 times greater than the amount of capital deposited.

How to Calculate Forex Leverage

In order to better understand forex leverage for beginners, you also need to know more about how to calculate forex leverage. As explained, for trading worth 100,000 US dollars, you only need to deposit capital worth 1,000 US dollars. This amount of capital is then called margin. This means that the leverage applied is at a ratio of 1:100. Here is the formula for calculating the margin:

leverage x transaction value = margin (1:100) x 100,000 = 0.01 x 100,000 = 1,000

In addition to calculating the amount of margin leverage, you also have to calculate the amount of real leverage. Real leverage is the net value of the leverage obtained from the broker itself. The formula is as follows:

total transaction value: total capital value = real leverage If using the same example above, the calculation will be like this: 100,000: 1000 = 100

Real leverage shows how many times bigger the actual transaction you make with a certain capital. In this example, with a capital of 1000 US Dollars for trading 1 lot with a value of 100,000 US Dollars, it means that the actual transaction you make is 100 times bigger than your capital. This is why realizing real leverage is also important to make you more careful when trading so that you do not experience losses that are also 100 times bigger.

In addition to being important to know forex leverage for beginners, you should also know that in forex, price movements are converted in pips (price interest points). This pip is a unit of measurement for changes in the exchange rate of currency pairs in the forex market.

An example of this pip movement is for example in the EUR/USD currency pair, moving from 1.13000 to 1.14000. This means that there is a movement of 1000 pips (1.14000 – 1.13000) but for the actual currency size what happens is a movement of 1 cent.

Risk is Directly Proportional to Leverage

From the long explanation above, there is one most important point that should not be forgotten in understanding forex leverage, namely the fact that risk will be directly proportional to leverage. This means that the greater the leverage, the greater the risk of loss that can befall traders who are not careful when trading. The real leverage that you read earlier can increase profits every time a pip moves and can also increase losses when trading.

For example, a trader starts with a capital of 10,000 US dollars and opens a position to Sell. Let's say the trader opens a position of 5 standard lots (500,000 US dollars), meaning the real leverage is 50 times greater than the capital. If there is a loss of 1000 pips (assuming 1 pip here is worth 1 US dollar) then the loss experienced by the trader is 5,000 US dollars. This means that the trader loses 50% of the initial capital.

It is different if the trader opens a position of 1 standard lot (100,000 US dollars) which means the real leverage is 1 time greater than the initial capital. As a result, if there is a loss of 1000 pips, the loss experienced by the trader is 1,000 US dollars. The loss is 10% of the capital. So it is true, the greater the real leverage, the greater the loss.

Conclusion

After learning more about forex leverage for beginners, it means that you can conclude some of the most important things. First, there are two types of leverage that must be considered and calculated carefully when preparing a trading plan, namely margin leverage, and real leverage.

Second, you must continue to remind yourself during trading that the greater the leverage ratio option you take, the greater the possibility of losing when trading. So really take the leverage option or open a position if you are sure that the position can generate profit.

With these two conclusions, your introduction to forex leverage can be optimized when creating a forex trading strategy. One simple tip for you. Try to make trading plans that include various options for the best forex leverage. Don't just calculate the target profit you want to achieve, but also the possibility of loss or risk of loss when trading.

Another tip that is no less important is to make sure you strengthen yourself with good forex market analysis skills. This is important to help you recognize market conditions that can generate profit when you are using safe leverage for trading.

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