Trading on forex or other futures exchange products have large lot sizes. One trade lot is worth USD 100,000 or Rp1.3 billion. Even ordinary people will think that it needs at least that much capital to be able to transact on the forex market.
However, that view is wrong. Because there are facilities provided by forex or futures brokers, that is leverage facilities.
What is Laverage in Trading?
According to Investopedia, leverage is an investment strategy of using borrowed money, specifically the use of various financial instruments.
With leverage, a trader can trade with the value of the transaction many times the capital he has. Generally, the leverage given in forex trading is 1: 100 or in a sense, the required capital is only 1% of the transaction value.
What about the profit gained by using this leverage?
The profits certainly can be greater than not using leverage. The following is an example of a trader, you name it Mr. X, with a total capital of USD 100,000. One time, MR X traded EURUSD and the price movement touched the target profit level (TP) that he set up so he got a profit of 50 pips.
The standard profit for 1 pip is USD10 for the contract value of USD100,000.
By using 1: 100 leverage, Mr. X is enough to use capital/margin USD1000 to transact with a contract value of USD100,000 / lot so that he gets a profit of USD500 in one transaction. If he trades 2 lots, then only need USD2000 capital to get a profit of USD1000.
It is different if Mr. X does not use leverage. He must use all of his capital of USD100,000 to get a profit of USD500. He also cannot increase trading volume up to 2 lots because the capital has been used up for one transaction.
With leverage, forex trading is not only meant for those who have large deposits. Because indirectly, leverage reduces the capital requirements that must be owned to participate in playing forex, as well as increasing the ability of funds that have been owned to be used for trading.
Read more: Why does Forex Trading Have Big Profit Potential?
