What is Leverage?
Currencies fluctuate daily depending on a variety of factors like economic indicator announcements, news and geopolitical events. Some pairs are more volatile than others and the more stable a country’s economy usually means less volatility. The world’s most traded pair, the EUR/USD, for example, moves around 100-150 pips a day (around 1%) on an average day, on days with big announcements like the NFP or ECB we might see movements of 200 or 300.
Learn About Leverage
For traders to aim for any decent returns, leverage is used to magnify these small price movements. Leverage is defined as the ratio of the amount of capital used in a transaction to the required margin. In other words, leverage gives you the ability to control much larger dollar amounts in a trade with only a relatively small deposit (your margin). For example, if the EUR/USD rate moves up 100 pips from 1.1305 to 1.1405 and you had invested $1000, you would have made $10 on that trade.
However, by using a leverage of 1:100, every $1 you invest is worth $100, so with your $1000 margin you can open a $100,000 deal. So for this example, your $10 profit is magnified to $1000.
Another way to think about leverage is to think of it as a loan. If you have $1000 and take a ‘loan’ that equates to $100 for every one of your dollars, you have $100,000 to trade with. Once your trade has been concluded, you return the ‘loan’ amount and keep the resulting profit.
It's important to note that leverage is often considered a double-edged sword since large price swings on accounts with higher leverage increase the chances of triggering your stop loss. Because of that, most beginner traders might prefer to start off using minimal leverage to get an idea of how to use proper risk management in order to minimise losses. More experienced traders may use higher-leverage accounts to maximise their wins and benefit from that advantages that forex has over other financial markets.
Leverage on the easyMarkets platform
easyMarkets offers as much as 1:400 leverage and guaranteed stop losses to ensure that you're able to take advantage of forex price action while protecting your account from negative balances at the same time.
Leverage with easyMarkets may be used with placing day trade orders, forward deals, pending orders on options.
When you open a trade on the easyMarkets platform, you choose the amount to trade which includes the ‘loan’ amount and the amount you need to invest or amount you risk. The more you risk in relation to your amount to trade, the higher the leverage you are using. And you will see your stop loss rate change in response. The more risk, the closer the stop loss is to the market rate. The stop loss closes your deal if it goes beyond this rate to ensure you do not continue to accrue losses.
This is one of the safety features of the platform and one of the benefits easyMarkets offers to its traders is that it guarantees the stop loss. And unlike other brokers, it won’t charge you for it.
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