2024-07-27 16:58:23
Leverage is a skill that traders develop when investing in forex and it has its intricacies. They end up controlling a large amount of money in the market using a relatively small amount of their own capital. In this way, they increase their exposure to the market without having to put large sums of money into it. So far the theory is easy, but it gets complicated when the numbers come in. Don’t worry, it’s explained step by step.
Expressing leverage as a ratio
Most commonly, it is 50:1, 100:1 or 500:1, as if it were a scale. But what is expressed with these numbers is how much money you can control in the market with one unit of your own currency. If you go to the first number, 50:1, it would mean that for every euro you invest in the market, you will have 100:1. foreign exchange marketyou could control 50. And that control is exponential: with 1,000 euros and a leverage of 100:1, you could be at 100,000.
It seems easy, doesn’t it? If the market moves 1% in your favor, you would earn 1,000 euros, that is, 100% of the invested capital. The problem is that if the market moves against you by that same 1%, you lose the 1,000 euros. That is, all your invested capital. With the leverage You can get a big return on a small investment, it has a lot of potential, but the losses are also bigger if the market turns against you and you can end up losing more than you invested.
This technique also makes the market more accessible because traders with less capital can enter the market with little. Risk prevention requires managing it through different means. The first thing to do is not to use more leverage than you can handle and to have a clear and developed strategy before moving a finger. Once you have the capital in circulation, you can use stop-loss orders that sell the investment before it drops much further and limit losses. And don’t take everything for granted: continually learning about the market means that changes in trend don’t catch you off guard.
A practical case for applying leverage
Leverage can be applied in the context of financial indicators with an example from July 15. That day, S&P/BMV IPC was in 54,953.11 pointswith a variation of 0.97%. Let’s say that an investor wants to put capital into this stock, that he wants to use a 100:1 and has 1,000 euros for this. That would mean that he can control 100,000 euros and that he could earn 970.
However, if the market moves 0.97% against you, you would also lose 970 euros. That is, almost all of your investment capital. That is why it is so important to learn how to use this ability in the safest way possible.
First and foremost, information, safety and testing
You need to make sure you fully understand how leverage works. The most immediate and practical thing to do is to get down to work: take courses and read good material to stay up to date. You can also find out about the tools at your disposal to limit your losses. We have talked about stop-loss orders and you can learn more about them to protect the capital you have invested before the market turns against you.
Learning to invest is a race of endurance. That’s why it’s best not to use the maximum leverage available right from the start. It’s better to go little by little, adjusting and calibrating your risk tolerance. Keep in mind that you’ll always have time to expand and put more meat on the grill. But to do that you can’t lose sight of — or underestimate — the size of your account.
If the various economic crises have taught us anything, it is that it is better not to have all your eggs in one basket. So don’t put all your capital in one operation either. Diversification will save you from falling into very deep holes. It is not a good idea to risk more than 1 or 2% of your capital in a single investment. If you lose it, you will not be left with zero.
You should always keep your eyes on the market and not be afraid of wasting time keeping up with the news and economic surprises that may affect you. Being immersed in this environment to the point of almost breathing it will make your decisions more intelligent because they will be based on all the information available.
Emotions have to be kept out of trading decisions. It is normal to be afraid of losing or that when you win, greed wants to come in and keep playing. But having a plan and following it prevents you from being carried away by feelings. As almost always in life, it is a better idea to stay calm because it will prevent you from fall for scams.
If you think that your emotions can affect you, or that you do not yet have enough information to move comfortably in the market, you can practice with a demo account. Try out your mistakes there and take advantage of the opportunity to familiarize yourself with the technique while there is a network protecting it. You can make all the revisions and adjustments to your strategy during this test before putting it into practice in real life.
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2024-07-27 16:58:23