How does the forex lever work?

This is how the forex lever works!
One of the most attractive characteristics of FX trading is the use of large financial levers, which also enable large profits in the case of manageable operations and in a very short time. The forex leverage, however, carries significant risks that should be understood before the commencement of trading. In the following we would like to explain the forex lever on an example.

Due to the leverage effect, forex trading holds high yield opportunities with low capital usage – at the same time also the risk of a total loss.
In forex trading you can profit from rising and falling prices.
Currencies are always traded in pairs.
In order to act with leverage, a margin must be provided.
In the case of insufficient capital coverage, a margin call is required.
Analysis tools are designed to help you better assess forex price developments and derive trading strategies from them.
Scheme of a currency transaction: That’s how it works!

In theory, a currency transaction can be reduced to two transactions: an investor borrows money in one currency and puts it in the other currency immediately thereafter. In a perfect market (only theoretically existent), the credit and investment interest rates are identical. If the loan is due, the investor will withdraw the money from his investment account, exchange it in the credit currency and wipes the loan. If a depreciation of the credit currency has occurred in the meantime, the investor gains a profit: He does not have to use the entire balance of the investment account to repay the loan. If an appreciation of the credit currency has taken place in the meantime, the investor suffers a loss: the balance on the investment account is not sufficient to completely pay off the loan.

So works the forex lever
So works the forex lever
In principle, foreign exchange is a foreign currency. For example, you may be credited in a bank account or securities that record a foreign currency.

Currencies are traded in the foreign exchange markets, where currencies are always traded in pairs. Rather, one currency is exchanged for another currency. The Forex trading platform is one of the most important trading venues and is one of the largest financial markets in the world. This is not a centralized exchange, but rather an electronic network of banks, central banks, companies, governments and also private individuals. These mark participants act directly with each other.

Direct to the forex Test winner GKFX

In order to earn money from a currency transaction, investors rely on price changes of one or the other currency and thus on the change in the exchange rate of the traded currency pair. The most traded currency pairs are:

EUR/USD
GBP/USD
USD/CHF
USD/JPY
USD/CAD
AUD/USD
NZD/USD
Investors can rely on both rising (long) and falling (short) price developments in foreign exchange trading. The trader gains profits if, for example, he assumes that in the USD/JPY currency pair the US dollar rate rises against the Japanese yen – it is long – and the corresponding event also arrives. In order to be able to act on the Foreign Exchange (Forex), an account must be opened with a broker specializing in forex. If you do not have any experience in forex trading, it is essential to obtain essential information and try it out with the help of a forex demo account.

As forex trading can always be leveraged to move high trading volumes with a small amount of capital, it is important to know how it works and what opportunities and risks are attached to it. The following section tells you more about it.

Forex Lever briefly explained at an example

For example, if the investor borrows $100,000 and puts it in euros, it corresponds to a EUR-long position in the volume of a lot. In practice, no bank or broker in the world will allow such a business without requiring collateral. The amount of the so-called margin varies from provider to provider. If the broker requires a margin of one percent, the investor must deposit 1,000 euros at a position size of 1 lot. In this amount, credits are blocked as margin on the forex account. The leverage effect is the result of the fact that only a fraction of the volume moving in the market must actually be raised from equity. The forex lever is the reciprocal (reciprocal) of the margin. A margin of one percent corresponds exactly to a lever of 100. How to trade the EUR/USD currency pair with Forex is to be read in our guide.

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