the higher the risk that you will assume. So, what it boils down to is this: a trader can use margin to create leverage. If the shares then go up by 20p a share, you could sell out of your position at 1,200 and make a profit of 200. Margin rates can also vary according to the regulatory rules in the country in which your account is based.
It can also be represented in the form of 100:1, 500:1 and so on, which means the same. And if the share price rises.20 you still make the same 200 profit as if youd bought the shares unleveraged. However, do you need ALL the EUR 100,000 to open this contract? You can also multiply the volatility of the underlying assets by the leverage ratio to find the volatility of the equity.
Leverage, contrary to popular opinion can be your friend if used wisely and in fact is essential if you want to make any profits in the first place. Trader A chooses to apply 50 times real leverage on this trade by shorting US500,000 worth of USD/JPY (50 x 10,000) based on their 10,000 trading capital. If all goes well, the final return could be much greater than your initial cash stake. (To learn more, see " Finding Your Margin Investment Sweet Spot. Smaller amounts of real leverage applied on each trade affords more breathing room by setting a wider but reasonable stop and avoiding a higher loss of capital. (For further reading, see ". This also means that the margin-based leverage is equal to the maximum real leverage a trader can use. Many traders believe the reason that forex market makers offer such high leverage is because leverage is a function of risk. Trader B is a more careful trader and decides to apply five times real leverage on this trade by shorting US50,000 worth of USD/JPY (5 x 10,000) based on their 10,000 trading capital.
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