How Leverage is Used in Forex Trading?

What is Forex Trading?

Forex trading is a process of buying and selling currencies with the hope of profiting from the changes in their value. It may seem confusing at first, but with a little practice it can be easy to understand. Forex traders use leverage to increase their potential profits. Leverage is the ability to trade a larger amount of currency than you actually have. For example, if you have $1,000 in your account, you can trade up to $100,000 worth of currency. This increases your potential profits and losses. It is important to use caution when trading with leverage, as it can quickly lead to large losses if you are not careful.

How is leverage used?

Let us imagine that you have $10,000 on your trading account. If you want to buy $10,000 worth of EUR, you will receive the amount equal to the lowest quotation (which is 1.4072 dollars per euro). You can use leverage in different ways depending on whether it’s about buying or selling currencies.

If you want to buy $10,000 worth of EUR, then the lowest price that you will receive is 1.4072 dollars per euro (if there are no market circumstances that affect this). If you want to sell it back, you will have to spend $12,340 (in case if the highest bid for selling one Euro was 1.4196 USD). At this point, you will make a profit of $1,340.

At first glance, it may seem quite easy to earn money with the help of leverage by simply buying and selling currencies. Unfortunately, it is not that simple in real life because there are many factors that affect prices (such as changes in exchange rates). Besides, the Forex trading market involves a lot of risk, and there is no guarantee that you will actually make profits with the help of leverage.

Leverage may be used in different ways when buying or selling currencies:

Buying:

1) Leverage can be calculated as “2”: For example, if you want to buy 10,000 Euros with a margin of 1,000 Euros (10% margin), the broker will loan you 9,000 Euros. The total cost of buying 10,000 Euros would be 10,972 Euros (10,000 + 972), resulting in a profit of 28 Euros.

2) Leverage can also be calculated as “1”: For example, if you want to use a 10% margin and buy 10,000 Euros with 1,000 Euros, the broker will loan you 9,000 Euros. The total cost of buying 10,000 Euros would be 12,340 Euros (10,000 + 2,340), resulting in a loss of 834 euros.

Selling:

1) Leverage can be calculated as “2”: For example, if you want to sell 10,000 Euros with a margin of 1,000 Euros (10% margin), the broker will receive 9,000 Euros. The total value of selling 10,000 Euros would be 11,068 Euros (10,000 + 1,068), resulting in a profit of 268 Euros.

2) Leverage can also be calculated as “1”: For example, if you want to use a 10% margin and sell 10,000 Euros with 1,000 Euros, the broker will receive 9,000 Euros. The total value of selling 10,000 Euros would be 13,040 Euros (10,000 + 2,040), resulting in a loss of 240 Euros.

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