How to leverage your capital in order to multiply your profits

[jessie adams]

Many beginning traders don't fully understand the concept of leverage.
Basically, if you have a start up trading capital of $5,000 and if you
trade on a 1:50 margin you can effectively control a capital of
$250,000. However, a two percent move against you and your trading
capital is completely wiped out. If you are a beginning forex trader
you should not use more than 1:20 margin until you get comfortable and
profitable and then and only then you can attempt to use higher
margins.
What does 1:20 margin mean? It means that with your $5,000 you will
control a capital of $100,000. Let's say you are trading the currency
pair EUR/USD and by using our entry strategy you have decided to enter
the trade on a long side. That means that you are betting that USD
will depreciate against Euro.
Let's say current EUR/USD rate is 1.305. Again, if your trading
capital is $5,000 and you are using 1:20 leverage you will effectively
be exchanging $100,000 to Euros. If the current rate is 1.305 you will
receive 100,000/1.305 = 76,628 Euros.
If the trade goes in your direction margin will work in your favour
and 1% decline in USD will mean 20% increase in your start up trading
capital. So if EUR/USD rate moves from 1.305 to 1.318 you will be able
to exchange your 76, 628 Euros back to $101,000 for a profit of
$1,000. Since your start up trading capital was $5,000 it is
effectively a 20% increase in your account. However, if the trade went
against you and USD appreciated 1% vs. Euro your account would be
reduced to $4,000. That would not have happened as our forex strategy
has built in hard stops to prevent such outcome.
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