For some people, forex trading is very interesting because it provides a great opportunity to make a profit. To be a successful trader you have to 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 margin usage facilities and include features that are much loved.
Trading using margin, you can deposit minimal funds into your trading account. You can also control larger funds to be used for trading on the real market with this margin.
The use of this margin has something to do with the concept of leverage which we will discuss here, so it is very important to learn so that you can profit from every opportunity.
Definition of Leverage in Trading
In general, the notion of leverage or leverage is a feature in forex trading through a borrowed fund scheme or in other words owed. This aims to increase the potential to achieve returns (return) from investments made by traders.
With this feature you can trade forex with less capital than you should. However, if you do not use leverage during forex transactions, the amount of capital required must be the same as 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 cannot generate profits. Meanwhile, for each forex transaction, the contract-size value is nominally US$100,000.
From here you can imagine, if one transaction results in a loss, then approximately how much will you lose?
For example, if you use 1:100 leverage to trade with a contract-size of US$100,000, you only need to spend US$1,000 in capital. This is what is called the margin.
Relationship 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 magnitude of the comparative figure shows how much capital (margin) is needed to obtain loan funds.
The main function of this feature is to reduce capital for playing forex so that the ability of traders to transact costs increases. For this reason, 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 strength of capital for trading.
Types of Leverage
Basically, leverage in forex trading can be interpreted as a temporary debt to a brokerage company with a certain amount and providing a small amount of collateral. This guarantee is called the margin.
However, in general leverage is divided into 3 types, among which are:
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 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. Besides that, it can also be said to be a fund that can be used by financial managers to maximize profits for equity shareholders. This type of leverage is considered capable of increasing greater profits.
Financial managers must be careful in selecting securities in order to mobilize these funds. To be able to achieve maximum profit, the ratio between debt to equity must be precise.
3. Combined Leverage
Combined leverage is a combination of the company’s operational costs and financial costs. loan. Borrowed funds here refer to large profits due to fixed costs.
The entire 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 benefits to business owners, shareholders also benefit.
The Risks of Using Leverage
Any action taken to increase the company’s profits must have a risk. 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 gained? The answer is no. Keep in mind that leverage means being in debt. So, the greater the debt, of course it will be more difficult to obtain profits.
Therefore, it is highly recommended to use leverage in an amount that is adjusted to the trader’s needs and ability to bear the risk.
2. Amount of Leverage Affects Psychological Burden
In forex trading, you can get profits in a few minutes depending on how big the opportunities are. However, in the investment world there is always the law of high return, high risk. This means that no matter how big you use leverage for trading, the opportunity to suffer losses will always lurk.
In addition, broker policies in providing leverage facilities also vary. Moreover, many brokers use 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.
Even so, if it can be used properly, the loan proceeds can help increase profits, especially return on equity.