Do you want to excel in forex trading? The truth is knowledge is the key to get the best results. If you are oblivious to the ongoing trends, then it is impossible to survive in this market.
In short, there is no place for the second-best when it comes to forex trading. The secret to success in the forex world is that you should define a roadmap first. You need to look into the fundamental concepts like online forex trading spread, margin, leverage, and pip.
If you have detailed insight about leverage, then you can make money fast. We will give you essential clues in this regard.
We will start by understanding the concept of leverage
The concept of leverage
Now, in forex trading leverage means that your broker will lend you money so that you can trade with large capital. If you use the leverage wisely, then you can make a lot of profits, but if you are reckless, you will lose your investment.
Understanding how leverage works
By now you have an idea about leverage let us explore how leverage works. Let us assume that you invested about USD 10,000 with a forex broker. The most commonly used leverage in this situation is 100:1. Thus, you can get $1,000,000 as trading capital.
The size of your trade depends upon your initial investment. Your investment gets multiplied by the leverage to determine the size of your trade. The broker lends you the credit money, and this is why you need to give the initial deposit to cover your credit.
What the broker does is that it takes up a portion of the trader’s equity. As a trader, you get the rest of the money which the broker calculates based on your leverage set. This process is popularly called the margin.
Remember that the margin is always a percentage of the leverage. If the leverage is 100:1, then, in this case, the margin is about 1%. This means for every single position you will have to give about 1% of the funds.
Now, let us move to an important aspect, and that is how to use the leverage intelligently.
How to use the leverage the right way
Figure out a good leverage ratio
When you are about to trade in the forex market, then you have to choose a good forex ratio. You have to keep the lot size into consideration when you have to determine the leverage. If your leverage is about 100:1, and you trade about 2 to 5 lots with about $10,000, then each pip will be equal to about $25 in this scenario.
What you need to keep in mind is that the volatility for most of the forex pairs is about 100 pips, so you can lose about $2500 which is about ¼ of your initial deposit.
If you want to limit your risk, then the best approach is to start with a small lot size. You can start with one mini lot. The number of lots helps to control the size of your position. Leverage gives you the edge to take up big positions, but it increases the risk also. The smart approach is to trade with mini lots even when you have the leverage of about 100:1, and an account of $10,000.
Every position will be about 10% of your initial deposit in this situation. The worth of every pip will be about $0.1. If you decide to make a move over about 100 pips, then your maximum risk will be about $10 only.
Think along the lines to adjust your leverage
If you feel it will be difficult for you to trade with small lot sizes, then you should set your leverage at a low level. For example, you can go for low-level leverage of about 1:2. However, make sure that you go for a broker that allows you to adjust your leverage in a few clicks.
Apart from leverage, you need to have an idea about other essential elements as well in the forex market. For example, you should have a clear picture of the trend of your asset, and this step is vital if you trade in commodities like crude oil.
For crude oil, you need to have the perception of Brent and WTI crude oil latest news and live price chart. Remember these essentials, and you will excel as a forex trader without an issue for sure, and profits will come your way.