How Calculating Leverage in Forex

The concept of leverage is fairly simple, but the true meaning is often lost in the mountains of marketing-speak, most forex brokers flat to our dealers. Misunderstandings arise always interchangeable use of the word "margin" and "leverage". These two concepts are related, but are not interchangeable, except in the most extreme (and suicidal), if an operator decides the maximum leverage available to him under the rules of the agent used.



- Margin The amount of the guarantee of customer deposits with a broker when borrowing from the broker to buy securities. This is your balance when you open your account.



* Leverage - The use of credit or borrowed funds to increase its capacity to speculation and increase the return on investment, as in buying securities on margin, but it can also accelerate the increase in loss by the same factor. Your influence depends on the size of the professions you against your account equity, and nothing else until you have no influence on the maximum that the Agency may take over. This value is normally represented by a ratio of indebtedness.



Margin requirements - expressed as a percentage, the margin requirement set by your broker to protect themselves against dealers with too much leverage, or in other words, to borrow more to dealers is their support depending on the risk profile of the Management Agency settings.



* This definition applies to business accounts. The broader definition of financial leverage is slightly more complicated, but fortunately it is not necessary for our present needs.



So if the marketing of an Agency team said their margin requirement is 1%, this means they need 1% of the size of your company to lend you the money you need trade. For example, if you trade $ 100,000 position size, then the broker requires $ 1,000 (1%) of your line to make the loan. As I said earlier, this number generally does not vary, unless you explicitly change the agreement with your broker. In addition, in this example, we know what the margin requirement, but we do not yet have enough information to calculate leverage, because we do not know what our take equity (see below) . Your broker would normally cite as "100:1" leverage, which is not entirely correct, because our real impact depends on our capital account. What they really mean is you maximum leverage on their margin requirement would be 100:1. How much of this leverage can actually use depends entirely on you, if you do not exceed this limit.



To summarize, the main difference is that the margin requirement is set by your broker, which determines your maximum leverage. How many of the resources available for your business using only your choice. Your broker is not to leverage. They have just the maximum you can use. A responsible employer usually never worry about that, as the leverage it uses is well below the maximum allowed by the broker. If the marketing of a broker to provide you guys "400:1 leverage" or "50:1 leverage" should generally makes no difference. Let us first see how the calculation of leverage, and so why not charge merchants to use.




How to calculate the "real" leverage



Real leverage "The term has recently been used to distinguish the" maximum "leverage that officers use in their marketing efforts. A few years ago, the word "leverage" was sufficient to describe what we calculate, but retail forex marketing jargon, the traditional use of the word changed.



As mentioned above, leverage in financial markets, debt: equity, so we need to calculate our debt and our own power (duh).



Fairness is very easy to calculate:



E = B + P



where

E = equity (the amount we are trying to calculate)

B = Balance

P = profit on open positions (open interest are negative in red)



Debt is something more complicated:



Compensation *



Where

D = debt (the amount we are trying to calculate)

T = Trade Size (in units of base currency)

BC = Base currency

CA = currency account


* Please note that Forex equation notation, and not where the mathematical notation. In mathematical notation, EUR / USD would be expressed in USD / EUR ratio due to a "dollar per euro deal. If you want to use the mathematical notation, currency pairs must be reversed.


So leverage, L, is calculated as follows:


take advantage of the equation




If this sounds complicated, do not worry, it is not. Let us through an example:


Suppose you have $ 10,000 USD denominated account and you want 1 mini lot EUR / USD at 1.2500 Name:

sample lever

T = 10.000 (1 mini lot)

EUR / USD = 1.2500

B = $ 10,000

P = 0 (we have no trades open to the Equity Account is equal to the account balance)

Changes in values:

benefit model results


These calculations do not take into account the spread, affecting P. equations for more complicated, because we value the PIP. In this example, the simple, but for couples where currency trading is not the same as the accounting currency, debt, our equation more complex. This omission is significant only for large values of P versus B (positive or negative) that are not generally take place in a forex account managed well.



Note also that this formula works equally well for couples not related to the currency account, but we must be careful to replace the right to do, and we have some additional information. So many young people say that we are 1 GBP = 200.00 JPY and GBP / USD = 2.0000 at the same $ 10,000 trading account:



window samples


The trade of such pairs, we need to know the current rate of the base currency against the currency of account, and we do not rate the currency, we can truly replace:


no leverage



It should also be noted that the real leverage will vary during the life of open trade. As the exchange rate, it affects the leverage equation by assigning P and move them to your advantage or against you, and they also affect Cb / ca.