Leverage

Merits and demerits of margin trading using the LEVERAGE

Rapid development of the Internet and the International Money Market has led in the mid-nineties to that situation, when in practical money trading for the purpose of income extraction; hundred millions private investors have been involved. Possibility to make the transactions with money not only in bank exchange office, but also directly at a stock exchange, passing intermediaries, has involved in this market means of numerous investors, having raised its liquidity. That is why FOREX has turned to the universal, highly remunerative, open and most liquid market in the world.

Note that operation profitability in FOREX is incomparably higher than it is in exchange offices. This became possible after the mechanism invention of the margin trading which has led to formation of the whole money trading institutes in some years that are helping small investors to operate in FOREX equally with the large players that are defining a condition of the international economy and politics: national banks, the large investment companies and other financial structures, which have control of billions dollars.

The happiness of the small investor to work in FOREX is only obliged to a so-called shoulder, or in a simple way, in English – the Leverage. We won’t give exact calculations and clever formulas in details.  There are a heap number of literatures for these purposes; margin trading using Leverage is a basis of all activity in FOREX market. We just wished to state objections concerning article in the first number of FOREX MAGAZINE which author is distressed about –how terrible! - possibility of heavy losses trading with Leverage 1:100 and even suspects awful, terrible and subtle brokers that they specially decoy into their net the unsophisticated trustful lovely traders. There are subtle brokers in this world, certainly. But we’re not talking about them; we’re talking about the tool - about the Leverage, i.e. about a basis of the margin trading.

Let's leave on the author conscience the statement that such Leverage is leading inevitably to losses. So it’s possible go as far as to say that the brick has fallen on someone's head, is guilty of a crime and consequently he needs to be FORBIDDEN once and for all. Let’s understand what does Leverage give, what for it is necessary, and is it well to use a shoulder which brokers give to us, traders. And at the same time, and what "shoulders" meet in the market and on what, perhaps, really, it is not necessary to rely on.

So, the most widespread size of Leverage in FOREX for the investors that are operating with the amount of money between 300 to 10-15 thousand of dollars is 1:100. What does occur to your money when you, having opened the account at the broker, start to buy and sell currency? What does this shoulder mean?

If you have bought, for example, one standard lot, you have actually got for one thousand dollars of your deposit at the broker a hundred times more: 1000x100=100.000 dollars and you’ve exchanged them for Euro. But you cannot really receive this money in hands, no other mechanism of such real transaction, except a robbery, is invented yet. It’s the main point of the margin trading: you get for these 100.000 American dollars which they give you in the interest-free credit, quantity of Euro, which you can allow yourselves at the course existing in the FOREX-market in the moment of the transaction settlement. And if the exchange rate is changed at the exchange office twice a day, then in FOREX it’s changed every minute, and sometimes every second. And if, for example, you were lucky (or you are so smart) and you have bought, for example, 78.740 Euro at the rate 1.27, then in 5 minutes, when you having seen that the rate is already 1.2730, you can sell 78.740 Euro, and having received on the account the sum of 100.236 dollars. But so far as 100.000 you have as though given on credit you are obliged to return them, and your "gain" makes 236 dollars.

So, actually, "shoulder" in itself is simply a tool that allows to operate in FOREX market with the considerable sums of money, and to receive serious profits, working with very small capital to FOREX measures. Is there any risk? Certainly, there is. But measure of this risk is your choice. If your capital is 10.000$ then you are entitled to take the risk in one transaction no more than 3 per cent of your capital, i.e., in transfer into realities of the concrete transaction - you may afford within the limits of moderate-risky trading strategy to stop-loss in 30 points from the price (if you work with one lot). Thus, if you will not be lucky, you will lose no more than 300$. But if you are in bits and you will take not one lot on this terms, but, for example, five lots, then your potential loss (at stop-loss in 30 points from the price) will already makes 1.500$ or 15 % of the capital. And Leverage is not guilty here. You either concede reckless game, or accurately watch that you may afford or don’t. But if you don’t like risk, don’t trade in FOREX, deposit your money in Savings bank and receive your wretched 12-17% of annual. There is no shoulder, no risk, and no champagne. And don’t groan concerning terrible risks. They are in FOREX, and it can’t be helped. Do you want to reduce them - save experience, money and as soon as you will have superfluous 30.000 dollars - you will find the broker company with "shoulder" from 1:50 by 1:30 without effort. The serious broker companies work with such sums and with such "shoulders".

And such shoulder, of course, bears in itself potentially considerably higher risks, than even considerably more widespread 1:100. But again - it is necessary to file the claims not to the broker, and, first of all, to itself. If you can afford similar, from the point of view of capital management, risks, and you feel yourself confidently enough in the market, why not? Because such shoulder does not only bear the big risks, but also bears the big profits. So - nothing ventured, nothing gained; fortune favours the bold.

Understand yourself and your capital: if you want, can and are able to risk, and to win - you are not afraid of any "shoulder". If you prefer conservative trading with smaller risk, and you have a risk capital at the rate of not less 30-50 thousand dollars that you should choose the reliable solid broker, which is giving to you a shoulder 1:30. If you have in your "granaries" of hundred millions dollars and this shoulder is not necessary for you - you can trade in FOREX as the large player - through your own bank.