October 1, 2020

Curt Cleaver

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Getting To Know The Risk Of Leverage And Understanding Auto Cut Calculation In Forex Trading

Real leverage has the potential to increase the profit earned from each pip movement. However, at the same time, leverage has the potential to increase the losses that may be suffered. In essence, the greater the leverage used, the greater the looming risk. Although it is not directly related to margin leverage, the large margin leverage can also cause the same thing. In the meantime, if you want to lower your risk in making the wrong decisions with leverage in forex trading, you can visit http://www.cnie.org/highleverage/forex-brokers.html to hire some of the most reliable forex brokers with high leverage.

To make it easier to understand, let’s look at the following real leverage calculations:

There are two traders, they are trader A and B, and they both have $ 10,000 capital. Both of them also make transactions by opening short positions in the same pair.

Trader A opens a position of 5 standard lots, which is worth $ 500,000. That means, he uses real leverage that is 50 times greater than his capital.

If trader A incurs a loss of 1000 pips (assuming 1 pip = $ 1), then that means he has lost $ 5,000. This loss means 50% of the initial capital.

then, what about trader B?

Trader B opens a position of 1 standard lot, which means the value of $ 10,000. In other words, the real leverage he applies is only 1 time the capital.

If trader B incurs a loss of 1000 pips (assuming 1 pip = $ 1), then that means he only suffered a loss of $ 1,000 or only 10% of his capital.

Aside from the risk, there is one more thing you must understand in forex trading, and that is the automatic liquidation position or often called as the auto cut is a liquidation that is carried out automatically by the online forex trading system when the customer’s equity is deemed unable to withstand price movements on open positions.

Your open positions will be forcibly liquidated by the system if the losses you have suffered are large enough to make the margin level less than or equal to 20%.

You must pay attention to the real leverage you use. The main key to use safe forex leverage lies in capital and risk management.