Forex Trading: Unleash Your Earning Potential

The main resource for forex traders is undoubtedly financial leverage, which is the mechanism that allows moving amounts far greater than those deposited in one's trading account (initial margin). The margin is the amount required as a guarantee to open a single trade. To quickly calculate the percentage of margin required by the broker, it is necessary to divide 100 by the leverage ratio. For example, if we work with a 1:100 leverage, the required margin will be 1% (100/100). To understand how much money is needed to open a single trade, let's proceed with a simple practical example. Suppose we deposit 2,000 euros into the account and work with a 1:100 leverage. We decide to buy a contract of 10,000 EUR/USD at 1.40. The required margin will be: 100/100 = 1% = 0.01. The margin required for the single trade will be equal to: 1.40 * 10,000$ * 0.01 = 140$. Most brokers offering foreign exchange intermediation services allow traders to work with leverage up to 200 times higher than the amount actually deposited into the account (1:200 leverage). This means that if we open an account with 1,000 euros, we can invest up to 200,000 euros even if we don't have all this money! It's clear that the extraordinary earning potential that this market offers immediately catches the eye. For example, if we buy a contract of 200,000 EUR/USD on the expectations of a rise in this exchange rate, a 1% favorable movement immediately produces a profit of 2,000 euros. Considering that we only have 1,000 euros available in the account, the return on invested capital (ROI) will be equal to 200%! What happens, instead, if I lose 1%? Our loss would be 2,000 euros, but if we only have 1,000 euros in the account, the broker automatically closes our position before the account is zeroed out, subsequently proceeding with the so-called margin call, which is the invitation to restore the initial margin in order to continue trading. In any case, when opening an account, it is always better to inquire in advance about the broker's margin management to avoid losing more than the capital actually deposited. The example proposed earlier served to highlight the extraordinary earning opportunities that this market can offer to the most prepared traders, but it is an extreme case because, for example, it does not take into account the trader's risk tolerance level and financial capacity. Financial leverage should be used accurately, trying to avoid the so-called over-leverage, which is an excessive exposure in relation to the money actually deposited into the account. Leverage allows amplifying gains, but also losses! The correct use of leverage is based on the concept of diversification: we can buy and sell many exchange rates that we consider potentially profitable while having a small amount in the account. However, we will have to carefully analyze the overall risk we take on in each operation to avoid exposing ourselves to initially unforeseen losses in the market.