| One of the many traps for traders just starting out is | | | | the affect it has on leverage, the price of EURUSD is |
| fully understanding the value of your trades and | | | | 1.2755/8, which means for each euro you will have to |
| knowing how to work out the true value of your cost | | | | pay 1.2758 US dollars if you buy euro and if you sell |
| if you leverage FX. | | | | euro you will receive 1.2755 US dollars. If you have a |
| It is often quoted that if you have an US dollar account | | | | $10,000 US dollar denominated trading account and |
| the value of a lot is $100,000 USD. This is not always | | | | buy one "standard lot" of (EUR100,000) EURUSD. The |
| true. | | | | value of the transaction in US dollar terms is $127, 580. |
| If you trade 100,000 GBPUSD, you actually trade | | | | You have $10,000 and therefore your leverage is |
| dollars to the value of £100,000 which is at time | | | | 127,580 / 10,000 = 12.75:1. For each one dollar you trade |
| of writing is about $153,000. There is a big difference | | | | $12.75 - you have leveraged or geared your account |
| between $100,000 and $153,000 | | | | 12.75 times. Not 10 times as you might have thought. |
| To Leverage FX you borrow money. To calculate | | | | To make better decisions it is important to |
| leverage you must first know how much you have | | | | understanding the exact amount that you trade. It is |
| (margin)and then you must divide that into how much | | | | worth mentioning that if you have more than one trade |
| you are going to trade with (the size of the lot you are | | | | open your leverage for each trade must be totaled to |
| going to buy, or in effect, borrow). | | | | give you your leverage figure. |
| Therefore you must know the value of the base | | | | If you trade one mini lot EURUSD, GBPUSD and |
| currency against the currency your account is in. | | | | USDCHF, the total value of units = 30,000 (3 mini lots) |
| Let's say you have EUR20,000 and you do a trade | | | | and your capital is $1,000. |
| (buy EURUSD of 100,000). Your leverage is 100,000 | | | | Your leverage is thus 30,000 / 1,000 = 30:1. That's high. |
| 20,000 = 5:1. For every EUR1.00 you actually have you | | | | You have borrowed 30 times what you have. |
| trade with EUR5.00. This is if your account is in euros. | | | | The obvious reason people borrow more is shown in |
| To calculate your risk you need to know what | | | | this example. If you borrow 5 times your capital, it was |
| currency is your account? Let's assume it is US dollar. | | | | levered 5:1 and you made $500.00. If you borrowed |
| The problem with leverage calculations in foreign | | | | ten times your capital and was levered 10:1, you would |
| exchange is that you have to express the base | | | | have made on the same market move $1,000 or 10% |
| currency of the currency pair you trade in the | | | | of your capital. If you borrowed two times your capital |
| currency of your account. | | | | 2:1, 2% and so on. |
| Just to confirm what the base currency is: The base | | | | Take your time and make sure you calculate how |
| currency is the currency named first in the currency | | | | much you are actually trading and check the leverage |
| quotation. Example: EURUSD, euro is the base | | | | is a figure you are comfortable with. Remember it is |
| currency. Example : USDJPY, US dollar is the base | | | | always better to be able to come back and trade |
| currency. | | | | another day. |
| An example of the base currency not being USD and | | | | For more articles about leverage go to my website. |