IN FOREX ROBOT TRADING, The most important reason why so many retail traders are lured to the Forex market in the first place is the availability of leverage.
We know you’ve heard us talk about this before, but it’s such an essential issue for a novice that we thought it necessary to bring it up again.
The forex market has become something of a breeding ground for those who seek to make quick money in the market, as well as for so-called gurus who claim to know everything. Leverage is the primary inducement that they employ.
What exactly is leverage IN FOREX ROBOT TRADING?
Leverage is defined as the capacity to control a significant quantity of money with little or no money of your own and by borrowing the remaining funds from others. To put it another way, it’s a loan from your broker that will allow you to have a greater amount of exposure in the market.
Using the above example, if you put $1,000 into your brokerage Forex robot trading account, he may allow you to trade a position for $100,000. Profits increase as a result of increased position and exposure (but also your losses can be greater).
What would your life be like if you didn’t have leverage? Let’s have a look at some examples:
Consider the following scenario: you have $5000 in your trading account and wish to purchase Amazon, Apple, or Facebook shares. At the time of writing this article, you would be able to purchase 43 shares of Apple, 18 shares of Facebook, and only one share of Amazon at the current market price.
If these firms see a fantastic 5 percent increase, you will receive 500 dollars as a bonus.
Can you fathom what I’m talking about? Although it is only $500, this is life without leverage.
So, how is life in the Forex market when you’re using leverage?
A leverage of 50:1 on the same $5000 account will allow you to manage 250.000 units of the base currency for the same $5000 account.
The buying and selling of a foreign exchange transaction are done in terms of lots, and a normal lot represents 100,000 units of the base currency in question.
For example, the EUR/USD has a pip value of $10, which is equivalent to one cent. Because of the leverage applied to the $5000 account, you have control over 250.000 units of the base, which equates to two and a half lots in terms of the trading volume. If I’m using 50:1 leverage, you’ll be able to trade 2.5 lots with a 5,000 account.
A leverage of 20:1 is equivalent to 100.000 units. This would be the equivalent of one ordinary lot. Consequently, employing one normal lot on a $5,000 account is equivalent to applying leverage of 20:1 in this case.
What is the mechanism of leverage?
Whenever you trade the markets, you should always have an amount in mind that you are willing to risk on each and every deal, as I have stated several times.
Assume that we are willing to put 1 percent of the $5000 account at risk on each transaction. 1 percent of $5,000 is equal to $50 dollars in today’s money. As a result, you are willing to take a $50 risk by employing the 1 percent.
A leverage of 50:1 means that you are trading two and a half lots while using 50:1 leverage.
Each pip is worth $10 each lot, which implies that the pip value is $25 for each lot.
You are only allowed to get two pips wrong before you are stopped out.
Leverage of 20:1:
The leverage ratio is 20:1, which controls 100.000, which is one standard lot.
1 lot is equal to $10 per pip. You are only permitted to make five pip trades before you are stopped out and lose your one percent stake in the account.
Using a 5:1 leverage ratio, you can control 25.000 units, which is equal to 0.25 lots of stock.
Because the pip value will be $2.5, you will have the opportunity to lose up to 20 pips before reaching your stop loss.
Leverage is used in the forex market.
The more leverage you employ, the greater the danger you are taking, and the greater the likelihood of being stopped out. Risk and leverage are inextricably linked, and you must be fully conscious of this relationship.
Forex Robots Broker’s leverage:
Some forex robot trading brokers will give you huge leverage in order to encourage you to sign up with them.
100:1, 200:1, 500:1, and even 1000:1 are all possible.
Consider the following scenario: a $5000 account with 500:1 leverage controls $2,500,000. If the one percent you’re betting on swings up or down, you might lose or earn $25,000 depending on the currency pair you’re betting on. That implies that if you are 20 pip off, you may lose your whole $5,000 trading account.
The good news is that, in recent years, a number of regulatory changes have compelled brokers to provide lower leverage. Beginning a few years ago in Japan, they have limited their permit to leverage to just 20:1 as a result of the crisis. In the United States, the current maximum leverage with which you can trade is 50:1.
The European Securities and Markets Authority (ESMA) has restricted the amount of leverage that may be used on key currency pairings to only 30:1.
Certainly, there is a deliberate effort in the business to safeguard clients such as yourselves from harm. This enormous amount of leverage can be quite beneficial when the markets are working in your favour, but it will completely destroy you when the markets are acting against you.
That is both the strength and the risk of leverage in the marketplace. It has the potential to work for or against you.
As is often the case, if you like my article, please leave a comment below. Enjoy your trade and good fortune until next time! I’m looking forward to seeing you in the Trading Room.