Leverage in a Base Currency
Leverage in a base currency:
Leverage in a base currency is Forex Club's unique approach to calculating the leverage (buying power), and consequentially margin requirements (how much you need on your deposit to make a trade). There is some disagreement amongst traders if "leverage in a base currency" approach is advantageous or not in comparison to the traditional way. Let us compare the two and let you be the judge. Traditional way - leverage in US dollars The common way to calculate leverage is to calculate in some currency, usually US dollar. Most brokers offer leverage of 100:1 in US dollars. Maximum trade size is then calculated as amount in USD x 100. Suppose you decide to purchase 100,000 GBP/USD ($10 per pip). What will be the necessary margin requirement for this trade? To figure this out we need to take current quote for GBP/USD (lets say 2.0285) and do the following: (2.0285 *100,000) / 100 = $2028.50is the amount you need to have on your deposit to purchase 100,000 GBP/USD, when cost of a pip is $10 and when current GBP/USD=2.0285 Forex Club way - Leverage in a base currency When you are trading with leverage in a base currency, remember that when leveraged, each dollar on your deposit = 100 units of any other currency. If you decide to purchase 100,000 GBP/USD at a rate of 2.0285, you need to have $1,000 on your deposit. By the same token, with $5,000 on your deposit you can purchase 500,000 GBP/USD or 500,000 EUR/USD, or 250,000 GBP/USD and 250,000EUR/USD simultaneously. The calculation is as simple as: Just divide trade size by 100.is the amount you need to have on a deposit to purchase 100,000 GBP/USD, when the cost of a pip is $10 and when current GBP/USD=2.0285 |
| Although the ability to earn significant profits by using leverage is substantial, leverage can also work against investors. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. |
