What is the role of foreign exchange leverage?

Leveraged trading is also called virtual trading and margin trading. That is, investors use their own funds as a guarantee to enlarge the financing provided by banks or brokers to conduct foreign exchange transactions, that is, enlarge investors’ trading funds. The proportion of financing is generally determined by the bank or broker. The greater the proportion of financing, the less funds the customer needs to pay.

The international financing multiple or leverage ratio is between 20 times and 400 times. The standard contract in the foreign exchange market is 100,000 yuan per lot (referring to the base currency, which is the previous currency of the currency pair). If the broker provides If the leverage ratio is 20 times, then a lot of 5,000 yuan (if the currency of the transaction is different from the account margin currency, it needs to be converted) margin; if the leverage ratio is 100 times, a margin of 1,000 yuan is required for one lot. The reason why banks or brokers dare to provide a larger proportion of financing is because the average daily fluctuation of the foreign exchange market is very small, only about 1%, and the foreign exchange market is continuous trading, coupled with perfect technical means, banks or brokers are completely Investors’ lower margin can be used to withstand market fluctuations without them having to take risks themselves. Foreign exchange guarantee metals are traded in spot, and have some characteristics of futures trading, such as buying and selling contracts and providing financing, but its positions can be held for a long time until they take the initiative or are forced to liquidate their positions.

In general, foreign exchange trading leverage has these functions:

  1. Reduce costs

The leverage of foreign exchange transactions is intended to help investors save transaction costs. Using leveraged trading mechanisms can magnify investors’ investment costs by tens or even hundreds of times. This is for investors with less capital. It is very advantageous that everyone can participate in foreign exchange transactions with a small amount of money, instead of paying extremely high transaction costs like buying stocks and funds, not only reducing costs, but also controlling transaction risks to a lower range.

  1. Expanding income

In addition to cost-saving effects, leverage also plays a significant role in expanding returns in foreign exchange transactions. Investors only need to invest a small amount of money to leverage large returns in the foreign exchange market, helping investors improve their small profits. The winning rate, despite the extremely low transaction costs, can obtain considerable benefits several times.
Foreign exchange trading leverage has these functions

How much foreign exchange leverage is appropriate?

Forex leverage itself is just a tool, so it is not good or bad. There is no risk of foreign exchange leverage itself, and the real source of risk is heavy trading, not assessing the credit level, not setting stop losses, not planning your own transactions, and so on.

So is the leverage the smaller the better or the larger the better? In fact, the choice and use of foreign exchange leverage is still a thing that varies from person to person, and it must match the investor’s investment situation, trading technology and trading mentality.

Let’s take an example. We know that the standard contract in the foreign exchange market is 100,000 US dollars per lot. Therefore, the value of one point of a standard contract is 100,000*0.0001=10 US dollars. Taking account funds of 5000 US dollars, trading 1 lot of EUR/USD is example:

  1. When the investor chooses 100 times leverage, his occupied capital is 1,000 U.S. dollars (100,000 U.S. dollars/100), then the remaining funds in the account are 4,000 U.S. dollars (5,000 U.S. dollars-1,000 U.S. dollars), that is, when the market fluctuates and loses 400 points ( 4000 USD/10 USD), the margin call system will force the position to be closed. (Can bear the risk of 400 points).
  2. When the investor chooses 400 times leverage, the occupied funds are 250 US dollars (100,000 US dollars / 400), then the remaining funds in the account are 4750 US dollars (5000 US dollars-250 US dollars), that is, when the market fluctuates, a loss of 475 points (4750 USD/10 USD), the margin call system will force the position to be closed. (Can bear the risk of 475 points).

Therefore, the more reserve funds in the account, the stronger the ability to resist risks, and the higher the amount of natural profit. But for margin trading, the leverage ratio magnifies the trading volume, which in turn magnifies the risks and returns! The leverage ratio is only a means, and the risk comes from the ratio of your open position (number of lots) to your account! That is to say, you can only build an account as large as possible. Corresponding positions, the quantity relationship between them must correspond!