Leverage Factor in Company Selection

In the early 1970s, the Bretton Woods agreement was over. Along with this, volume increases started in foreign exchange transactions. This helped swaps and similar derivatives come to life. Technology is improving every day and with this, leveraged transactions became the center of attention for individual investors as well as institutional investors. Therefore, people pay attention to the leverage factor while choosing a company. Forex markets have made great progress, especially in the last 10 years. As of 2012, in accordance with the CMB regulations, forex platforms began to be audited. Individual and institutional investors could make leveraged transactions on these platforms. Thanks to this, there were opportunities to make high-volume transactions. However, not every forex platform has leveraged transactions. For this reason, the leverage factor is of great importance in company selection. It is possible for you to gain much more with these transactions.

Leverage Example in Forex

Leveraged transactions are frequently used in the forex markets. However, leveraged trading is seen by some investors as a risk factor. Therefore, we will clarify this concept by giving an example of leverage in Forex. 

For example; Let’s assume that Mr. Kent, who opens a forex account with a leverage ratio of 1/100 in Plus500, initially deposits $ 1000. The biggest position that Mr. Kent can open with this amount deposited is 100 thousand dollars. We have to pay attention to the maximum position here. Because, depending on the forex platforms used, the nominal size of the position opened can also be seen on the order screen. If Mr. Kent is trading in the USD / EUR pair in MetaTrader4, one of the most used trading platforms in the market, he will open a 1-lot position by selecting “1” in the part that appears as a volume in the order field. The nominal size of this position opened by Mr. Kent will be 100 thousand dollars. Now, $ 1000 in Mr. Kent’s account increases and decreases to take the profit and loss of a $ 100 thousand position for each pip rise-fall of the USD / EUR pair.

Are Leveraged Transactions Risky?

It often comes with the question. However, the leverage ratio and risks are not very interdependent contrary to what is known.

If we give an example in this regard; Mr. Kent opened an account with 1/1 leverage and deposited 100 thousand dollars. He wants to open a $ 100 thousand position on the USD / EUR pair. For this transaction, Mr. Kent must use all of the initial margins to open a 1 lot position on the MetaTrader4 platform. There is no free coverage left. However, if Mr. Kent had opened an account by choosing the leverage ratio of 1/100, in this case, again, 1000 dollars would be reserved from the initial guarantee of 100.000 dollars to open 1 lot position. Thus, the remaining 99 thousand dollars will be assured.

Leveraged Transaction Evaluation

With the leveraged transaction examples we have given above, we see that; It enables high volume positions to be opened with low leverage starting collateral. The risk factor in this regard is that individual and institutional investors use high leverage to open more positions. Forex markets and leverage can sometimes be an opportunity or a risk factor. Because the size of the profit earned is directly proportional to the risk taken. However, it is entirely up to the investor to adjust the level of this risk and keep it in balance. Leveraged transactions support investors to gain much higher profits. Choosing platforms that offer leveraged trading opportunities will be of your benefit for high-volume transactions. For this reason, the leverage factor is very important in company selection.

SEE ALSO: 10 Golden Rules for Implementing Forex Strategies and Successful Trading

Share this article

Caroline Tetra

Leave a Reply

Your email address will not be published. Required fields are marked *

Next Post

How to Read Forex Charts?

Fri Apr 30 , 2021
How to Read Forex Charts? The question is often asked by entrepreneurs who are interested in the investment sector. Before doing any transaction in the Forex trading market, you need to learn the charts well. The basis on which most of the exchange rates and detailed analysis forecasts are made […]
Subscribe to Our Newsletter Don't miss the latest news!

Enter to get a chance to win 100$ every week!