Understanding Leverage

Leverage is not even a double-edged sword, the guillotine - and head on the block - PART 1

Dr Forex says - Let me explain once and for all the influence that is not what the broker allows you to use, is what you decide to use.

I'm finally at the point where bird watching in Lion Country newsletter is ready for publication. If you have not received one before, do not start watching the mail spam filter. This is the first newsletter.

Choice of subject is a difficult problem, but the "leverage" is always high on the priority list for the first edition. Recently, once again realize clearly how misunderstood the concept is important for all aspects of money. In my mind, there is no doubt that most of the problems that traders have begun to exploit. I dedicate this first newsletter, then this concept - and the destructive power of influence in the world of retail forex trading.

Some data

I have not personally seen a trading account deletion does not use too high.

There is also no record of profitable trading account and trade-oriented and sustained high leverage, short stop.

I ask my clients since the early mentoring what they believe is the reason why the earlier losses. Most answers are something to do with leverage, I do not understand at all, or only partially, or underestimating once they understood.

The leverage is so, it is ...?

I receive many questions as follows:

I read your book and I liked it. You give me information where I can get 1:01 of the company to exploit you mention on page 108 of your book? I use a demo with only $ 1,500 in the account with 200:1 leverage, and I am a bit worried by this contract, including a mini with a coin.

Or:

I am advised to contact your agent can operate with less than $ 10,000 with low leverage, but only offer a leverage of 50:1 to 3:01, and not as you suggest.

It is clear that leverage is misunderstood and this misunderstanding is the source of forex trading and the loss of a vain attempt to overcome these losses without tackling the root causes.

Regulatory warnings that leverage is a double edged sword that can work for or against going completely ignored and a warning "past performance is not indicative of future performance" is flatly ignored.

Using the most misunderstood by the marketing wizards of forex (the friendly forex broker) have a little trick of the hand that moves the focus of this very important fact of how many of the levers for the operator amount of trading capital forex marketing wizard is ready to provide the merchant.

Everything you read on the influence to do with the maximum leverage you can achieve, and very little about the application of prudent leverage in the forex trading system. In other words, the agent tells you how so you get if you want, not how much you should take, if you know better.

Warren Buffet said - "The risk of not knowing what you do."

People talk about 100:1 leverage - "I trade with 100:1" without knowing what it means. I'll show you later how this is his greatest enemy by being stupid about this important concept. I hope that many of you will get a big "AHA" experience of the newsletter.

Definition of debt

This is a general definition:

The mechanical strength or the benefit obtained by using a lever.

The definitions contained in www.investorwords.com said lever is:

The extent to which an investor or business is using borrowed money.

Closer to forex trading: www.thefreedictionary.com

The use of loan funds or loans to improve its ability to speculate and to increase the rate of return on investment, like buying securities on margin.

Introduced the concept of "margin". Make sure we understand what the margin is:

Definition of margin

Number of customer deposits with the guarantee broker when borrowing from a broker to buy securities.

Here's what to do if you open a forex trading account. Your deposit guarantees to request foreign currency trading. In fact, you do not need to borrow, but you can if you wish.

When the loan is at stake is public knowledge that the amount the lender will be willing to lend has certain limitations. Obviously you can not lend in unlimited amounts.

Something that most traders is that connects the marketing wizards use the term "influence" and "margin" very loosely and interchangeably. This causes much confusion. I'm sure this is done deliberately, as forex broker interest that traders do not see high leverage as a problem of destruction, but as an opportunity.

Make sure we understand first "leverage" and "margin".

To understand the use for marketing purposes, we will use the well-known concept. Want to buy a house, you do not have the capital available, but you must pay the salaries and fees on a regular basis, then go to the bank and borrow money to pay for the house. So, increase your income / salary. There are limitations based on, among other things, the income which means that the amount you can borrow based on your income is limited. There is a maximum you can borrow. Obviously, yes, but very important concept for the lender - the maximum that should be given to maximize the return on capital without overexposing the same risk of default on their side.

(Think of the touchline. If forex trading is largely with borrowed funds why not call upon the agents of interest .... Think about it?)

Remember this: The lender focuses on high, while the borrower should be concerned with the minimum - to borrow unless it can, but still get a bang for the buck.

We now return to your trading account: Want to improve your speculative capacity by leveraging their investment, therefore, borrow money to negotiate with your agent.

Before your broker will lend you money to put aside, you want the lever. His agent, being a prudent businessman has calculated the risks in advance and quick to tell you what is the maximum that you can borrow. In forex is typically a few hundred times their capital, but also could be two hundred times their capital, even four times its capital. It is a part of the equation:

"Dear customer, you will be able to use your money (200:1, 400, 1) 100:1. Hope we can have one. Long and mutually beneficial"

The other side of the equation is how many of these loans are available to use in efforts to speculation.

What influence is to apply its own decision and not something you can force the broker to you.

Here's a test:

We start with an example of the stock market.

You open an account with a stockbroker, with say $ 10,000. You can buy the stock worth $ 10,000. Say you do. Do you use your funds?

No, you did not borrow a penny from a broker. You have $ 10,000 to the value of your shares when you buy is $ 10,000 (not counting the cost for the moment).

How is the leverage?

It divides the capital into the value of the transaction and to declare that the report of the "transaction value": "Capital".

In the above example splits $ 10,000 / $ 10,000 = 1:01

Well, your online broker an easy day to send the message that now allow trading on margin, and you can borrow money to buy shares at the current value of its shares. For convenience, we say that the value of its stock is still $ 10,000. In other words, you can now buy another $ 10 000 worth of shares, while its capital contribution remains at $ 10,000.

How, after you have just received a hot tip and now has a transaction value of 2 x $ 10,000 = $ 20,000 divided by $ 10,000 of capital leverage = 2:01. Or you can choose not to you. Vital for the broker: do as much as possible

Maximum leverage can be applied (as opposed to how much you want to implement) is the decision of its agent:

It is important that you should look at the example above is that you used all the influence which is authorized by the broker. This is very important. Officers take a big risk of lending money and therefore have certain rules they must obey. There is a limit to what you can borrow. The upper limit is used 2:1 or from another angle range of 50%. You must be at least half of the total value of transactions available in the margin (collateral in other words, if you're not as hot as you think traders).

Reach is typically expressed as a percentage, while the use expressed as a ratio.

Marketing assistants currency realized the fact that they can offer very high leverage to your advantage to attract investors online in traditional markets. In addition, many online investors that hold the shattered by the fall of 2000 and the loss of up to 90% of previous profitable stock portfolios became commonplace - more leverage with plans stock options stock.

As a result, began to look on the roof of the lever of 100:1, 200:1, and with the introduction of mini accounts, even 400:1 and 500:1 are available.

Terms such as "trade with 100:1" leverage became the agenda.

An uninformed public trading and do not include online swallow this hook, line and sinker, and is negotiating with "100:1 to 200:1 leverage," do not understand what they do.

In fact, the agent would only say "that will lever your margin up to 100:1, 200:1 or 400:1 at the absolute maximum, if you use all the capabilities of your loan with us."

But you must remember leverage is a double edged sword. You can work for you and against you. Then began the race in the forex losers out there: where is the highest leverage, lowest margin and spreads narrow on the offer? As if this lethal combination that contribute to the success of the ...

So if you go to a nice corridor that offers lots of 100K and 10K mini lots you will find that many of 100K typically have a maximum of 100:1 and 200:1 leverage on mini accounts 400:1 or .

Therefore, it is the point of online currency: It allows a maximum leverage of 100:1, 200:1, 400:1. Vital for the trader: minimum necessary harness

Last seen in (dealer) on your side?

The questions asked by your side is: How many rooms for what I need to trade a certain value of the transaction? The answer is simple, if they offer what I can lever my funds 100 times, then it is 1/100 = 1%, 1/200 = 0.5%, 1/400 = 0.25%.

Returning to the example of the stock market does not at least a question of leverage, because if you have limited funds, then it would be wise to buy shares at low prices in order to invest in basket of shares.

But in the currency market, where the value of the transaction was 10K or 100K minimum initial and shocked online trading public is attracted to use the "advantage" of the high leverage to account for only $ 2000 - $ 3,000 or mini accounts from $ 200 - $ 300, the minimum leverage certainly played role.

For all this, I will stick better to use concrete examples:

Several years ago a company now defunct tip service has made a study of market Forex trading has many typical 100K. Average account size was $ 6,000.

There is no doubt that the average trader would have to borrow money by the broker, the use of funds. The question is "how"? To perform a minimum transaction is divided 100 000 100 000 to 6,000 and that's the answer: 100000/6000 = 16.67.

In other words, it must borrow 16.67 times his money to do a minimum of a transaction and then use a minimum leverage of 16.67:1. Just to make a ridiculous trade. Commercial success: Know your real influence

I would not be too technical about the exact influence in this example.

In fact, if you have an account in U.S. dollars, must disclose the transaction value in U.S. dollars before calculating the appropriate leverage effect. So if you trade 100,000 GBPUSD trades in dollars to the value of £ 100,000, which is both writing about $ 190,000. There is a difference between $ 100,000 and $ 190,000. (As Warren Buffet said: Risk of not knowing what you do ...)

With the flexibility offered by mini lots (10k), many micro (1k) and many variables (size of the operator sets), it is easier today to determine the real leverage of a person, as they operate in extreme cases of indebtedness minimum maximum leverage.

Let us return to the previous question:

You give me information where I can get 1:01 of the company to exploit you mention on page 108 of your book? I use a demo with only $ 1,500 in the account with 200:1 leverage, and I am a bit worried by this contract, including a mini with a coin.

"Can you give me information where I can get one one lever?"

Given the influence that is the transaction value divided by capital is an important aspect of the capital and size of the minimum position, because to be able to negotiate 1:01 You must be at least the same minimum capital transactions. In your case, you will have to negotiate with a broker that offers a large number of variables or batches of not more than 1500 micro-units.

"I use a demo with only $ 1500 in the account with 200:1 leverage"

You see here to get the maximum, or the maximum amount you can borrow. This is a fixed amount (percentage) applicable to the entire transaction and the transaction is not affected at all as long as you stay within this limit.

"I'm a little worried about it, even on a mini contract with one currency."

First do not have to worry about "200: 1. Leverage" simply means that the maximum allowed for trade, not what you have to negotiate (it's your choice!). For maximum trade is completely ridiculous. His real influence if you trade a mini contract with $ 1500 will be in the region of 6:01 or 7:01. (10000/1500).

It is interesting that you mention one currency also, because you should know that if trade 2 or 3 pieces of greater influence. Say you trade a mini lot EURUSD, GBPUSD and USDCHF, the total value of units = 30,000 (3 mini lots) and its capital is $ 1500.

The leverage is 30000/1500 = 20:1. He was raised. You borrow 20 times what you have. To trade forex profitably, you need a calculator for $ 3.00 is $ 300.00 per month mapping service.

Here's proof:

Speak of "leverage" 200:1.

I hope you understand now that this refers to the maximum the marketing wizard will allow you to borrow and you can borrow much less to maintain its influence healthy and your account afloat. But if you go to extremes to be really desperate or stupid, and for all practical purposes already on the way out.

So what is the currency of the marketing wizards call "leverage" actually expressed by the ratio of margin requirements, rather than as a percentage, the more reasonable and have no impact on their business, unless removed or , essentially, about to be.

Let's say a trader has $ 10,000 and trade in the corridor that offers "flexible leverage".

You can select the "leverage" its, 400:1, 200:1, 100:1 or 50:1. What this means is that you can choose your margin requirement (which will determine the maximum amount you can borrow from them) to 0.25%, 0.5%, 1% or 2% of transaction value.

Trader decides to buy 5 mini lots EURUSD, is € 50,000 and the transaction value of the value of a pip on this transaction is $ 5.00. Let's say he made a profit of 100 pips is $ 500 or 5% of its capital.

Is the margin requirements are flexible, generally called "leverage" on this result?

The answer is "no."

• Leverage = 400:1 = 0.25% = $ 25 X 5 = $ 125. After 100 pips move Trader makes $ 500.
• Leverage = 200:1 = 0.50% = $ 50 x 5 = $ 250. After 100 pips move Trader makes $ 500.
• Leverage = 100:1 = 1.00% = $ 100 x 5 = $ 500. After 100 pips move Trader makes $ 500.
• Leverage = 50:1 = 2.00% = $ 200 x 5 = $ 1000. After 100 pips move Trader makes $ 500.

It is important that you understand this:

Only variable in global trade this year is the real influence, no margin requirement.

In the example above the market moves 100 pips, regardless of the margin requirement.

The only distinguishing factor is the amount of the operator borrows from what is available. Depending on the amount that the trader will have different results.

In the example I gave you five times the capital, was in debt and 5.1 is $ 500.00. If you paid ten times its capital and leverage of 10:1, to be held in the same market moves U.S. $ 1,000 or 10% of its capital. If paid twice his capital 2:1, 2% and so on.

Margin - Leverage - Risk

People mistakenly think that to assume the risks associated with margin requirements, the "leverage" market participants exchange.

How many times have you found a money management or risk management system that says you should not risk more than x% of their capital in a trade?

Let's say our operator uses this technique and not "take the plunge over 10% of its capital" in commerce.

In the example above, in the case of the 2% margin (50:1 "leverage") Trader "uses" 10% of their capital (as margin). (I hope you now realize that in fact runs the risk of their capital 10 times!)

So if this approach is that the risk has been defined in terms of margin that is "prepared" in trade for the following cases: using a calculator!

Trader has $ 10,000 and is willing to "risk of 10%"

• Leverage = 400:1 = 10% 0.25 / 0.25 = 40. That is, 10% "risk" will be a great 400K 40. Leverage real = 400/10000 = 40:1. The pip value = $ 40.00.
• Leverage = 200:1 = 10% 0.50 / 0.50 = 20. That is, 10% "risk" will be 20 lots or 200K. Real increase = 200/10000 = 20:1. Pip value = $ 20.00
• Leverage = 100:1 = 10% 1.00 / 1.00 = 10. In other words, 10% "risk" will be 10 lots of 100K. Real increase = 100/10000 = 10.1. Pip value = $ 10.00
• Leverage = 50:1 = 2.00% 10/5 = 2.00. That is, 10% "risk" will be 5 lots or 50K. Enjoy the true = 50/10 000 = 5.1. Pip value = $ 5.00

The strategy of risk management itself, and then said in general, do not risk more than x% of their capital in potential losses, therefore calculate your stop loss points before a percentage of capital. Therefore, the stop loss is usually set at 2% or 3% of the capital.

In this case, if 2%, the maximum loss would be $ 200 (2% stake in $ 10,000). However, as is currently the first to calculate the pip value based on the false principle (for the influence of traders), while the traders who are considered "at risk" of 10% stake in four cases.

• Leverage = 400:1, the pip value = $ 40.00, "the risk of 10%." The stop-loss of 2% must be 5 points.
• 200:1 Leverage = pip value, = $ 20.00, "the risk of 10%." The stop-loss of 2% should be 10 points.
• Leverage = 100:1, the pip value = $ 10.00, "the risk of 10%." The stop-loss of 2% should be 20 points.
• Leverage = 50:1, the pip value = $ 5.00, "the risk of 10%." The stop-loss of 2% should be 40 points.

About clearly indicate that the lack of understanding of leverage can destroy your chances of success.

It also shows that the call management system of money is totally wrong - the theory of the spreadsheet - and it has nothing to do with real profitable business.

Suffice it to say that while "400:1 and 200:1" option is not used much, you'll be tempted by the selection of 100:1 and 50:1 as suggested by most experts there below, accompanied by the required 20, stop 30 pips and 40 all time hit (followed by the direction of market movement inevitable sooner than expected).

Summary

• What is commonly known as leverage is really necessary margin expressed as a ratio if you use all the power to borrow agent allows.
• The real influence is determined by dividing the capital into the value of your position.
• Real influence will vary from trade to trade and commerce with a simultaneous increase.
• The margin requirement has no effect on the risk, if the trade properly with modest influence within your means and not to be used as a risk to the calculation of principle.