The Concept of Leverage

more general explanation of this term can be found in the glossary section of education corner on our website www.sarrax.com.

In the retail foreign exchange market, the term leverage determines the amount of risk an investor is able to take as a multiple of his margin.

Clearly, the higher the leverage, the more at risk his capital (or margin) is at.

For example, an investor places Eur 10,000 in his margin account. At his account opening, he has specified that he wished to trade with a leverage of 1:100.

That is to say he can trade with an open position of Eur 1,000,000 (10,000x100).

If he were to trade Eur/Usd in an amount of Eur 1,000,000, each pip of movement in the price is Usd 100 (Eur 77).

Therefore his total capital would be at risk if the price moved approx. 130 points against him. Obviously it is not prudent to “put all your eggs in one basket” but this simply illustrates the way risk is magnified by leverage.

Equally, were the markets to move in the investors favour, a move of 130 points would double his money.

This is both the beauty and reality of the retail forex market. The key to making money is to be disciplined. Refer to the five golden rules to learn more about discipline