For some people forex trading is very interesting because it provides a great opportunity for profit. To be a successful trader you must know everything about trading. One of the main factors in forex that needs to be studied is the concept of leverage or also known as leverage.
The concept of leverage can be profitable for traders, but it can also be dangerous if not used carefully. The advantage of forex trading is that traders are given the facility to use margin and include features that are much-loved.
Trading using margin, you can deposit with minimal funds into your trading account. You can also control larger funds to use for trading in the real market with this margin.
The use of this margin has to do with the concept of leverage which we will discuss here so it is very important to learn in order to profit from every opportunity.
Understanding Leverage in Trading
In general, the notion of leverage or leverage is a feature in forex trading through a loan scheme or in other words debt. This is aimed at increasing the potential in achieving returns (returns) from the investments made by traders.
With this feature you can trade forex with less capital than it should be. However, without using leverage during forex transactions, the required amount of capital must be equal to the contract-size value.
Every day in the forex market there are lots of opportunities that can be obtained, but sometimes some of these opportunities can't make a profit. Meanwhile, for each forex transaction, the nominal contract-size value is US$100,000.
From here you can imagine, if one transaction turns out to be a loss, then approximately how much will you lose?
For example, if you use 1:100 leverage to trade on a contract-size of US$100,000, you only need to spend US$1,000 of capital. This is what is called the margin.
Relation With Trading
In forex trading, leverage is displayed in the form of certain ratios, such as 1:25, 1:50, 1:100, 1:200, and so on. The comparison figure shows how much capital (margin) is needed to get loan funds.
The main function of this feature is to reduce the capital to play forex so that the ability of traders to trade costs increases. For that it is mandatory for beginner forex traders to learn it. Especially now that many brokers provide these facilities to traders with various ratios. The greater the leverage, the greater the power of capital to trade.
Types of Leverage
Basically, leverage in forex trading can be interpreted as a temporary debt to a brokerage company with a certain nominal and providing a small amount of collateral. This guarantee is called margin.
However, in general, leverage is divided into 3 types, including:
1. Operating Leverage
Operating leverage is the funds used by the company for operational activities. It is expected that this operating leverage can increase the company's sales figures.
The reason is, with the fixed costs that exist in this type of leverage, the company can cover all operational costs. That way the company can further optimize its focus on other sectors that require large amounts of investment capital.
2. Financial Leverage
Financial leverage is a source of funds from outside the company. In addition, it can also be said to be a fund that can be used by financial managers to maximize profits to equity shareholders. This type of leverage is considered capable of increasing greater profits.
Financial managers must be careful in selecting the securities to mobilize these funds. To be able to achieve maximum profit, the ratio between debt to equity must be right.
3. Combined Leverage
Combined leverage is a combination of the company's operational costs with financial costs. loan. Borrowed funds here refer to large profits due to fixed costs.
The total cost describes the benefits and risks of using leverage in a definite amount. Combined leverage is very useful for companies because in addition to bringing profits to business owners, shareholders also benefit.
Risks of Using Leverage
Every action taken to increase the company's profits certainly has risks. Likewise with the leverage used for forex trading. Therefore, it is important for you novice traders to know the risks, namely:
1. The size of the leverage is not directly proportional to the profit
Is the size of the leverage proportional to the benefits obtained? The answer is no. Keep in mind that leverage is the same as debt. So, the bigger the debt, the more difficult it will be to make a profit.
Therefore, it is highly recommended to use leverage in an amount that is adjusted to the needs and ability of the trader to bear the risk.
2. Leverage Amount Affects Psychological Burden
In forex trading, you can make a profit within a few minutes depending on how much opportunity you can take advantage of. However, in the investment world there is always a law of high return, high risk. This means that no matter how much you use leverage for trading, the opportunity to experience losses will always lurk.
In addition, broker policies in providing leverage facilities also vary. Moreover, many brokers use floating or floating leverage so that they can reduce trader leverage if needed at any time. Therefore, it is also important to choose a broker that provides fixed leverage facilities.
However, if used properly, the loan proceeds can help increase profits, especially return on equity.