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What Is Leverage,pips and spread

Leverage:

Leverage, which represents a margin trading ratio, enables traders to borrow a certain amount of money that allows them to trade in much bigger deals. Moreover, leverage allows one to trade using more money than they have in their account. Therefore, you “leverage” your ac- count’s balance to place a bigger trade. Currency rates move very slowly. This makes small trades unfashionable as they only return small profits and losses for every pip rate changes. Therefore, leveraging helps one to trade in larger deals hence amplifying their potential profits and losses. 

According to the new ESMA intervention measures, leverage rates can only be offered between a margin of 2:1 and 30:1,depending on the specific instrument.But many brokers offer this upto 3000:1 also. 

How Leverage works?

Leverage in Forex trading is all about entering borrowed capital into transactions. The money is borrowed from a broker who acts like a bank that fronts you some cash to invest, which in this case is to buy currencies.

Take the option shown below:

A. Leverage of 20:1 and 

B. Leverage of 200:1

 

With a margin trading ratio (leverage) of 1:20, option A allows a trader who has invested $100 to trade with US $2,000. Moreover, if the pip value changes by +0.0030 ,the trader makes a profit of $ 6 hence increasing the balance in their account to $106,thus an ROI of 6%.

On the other hand, option B allows one to trade with $20,000 and makes a $60 profit. The trader’s closing balance in their account would be $160 with an ROI of 60%. This shows that the higher your leverage, the higher your chance of a better ROI.

Tips and warnings when you use Leverage:

Keep your losses within manageable limits:

Well, professional traders advie that one shouldn’t risk all their money in one transaction. Besides, a trader should diversify their risk by spreading it out to about 5% of their total deposit per trade. In case of any losses, they’ll not only be small but will not get out of hand.

Use Stop-Loss Orders and other strategic stops:

The stop loss order lets your broker know to sell a currency when it hits a certain set price. These stops work around the clock in the forex market, therefore, protecting your position when you are logged out of the system. In addition, the strategic stop caps the losses while also protecting the profits.

Always start slow at first:

This helps in building the novice traders’ experience and confidence in their early days of trading. Once you’ve learned the ins and outs of forex trading, you can consider increasing the leverage.

What is Pip/Pips?

Price Interest Point represents the smallest change in a currency pair. Typically, it is the fourth decimal point, although many brokers quote using the fifth decimal. However, the fifth decimal doesn’t really affect the price as it changes really quick.

Currency pairs that include the U.S. dollar, a pip is 1/10, 000 of a dollar, whereas when the currency pair includes the yen, a pip is 1/100 of a yen because the yen is closer in value to 1/100 of other major currencies.

Example for understanding the pips

suppose current price of EURUSD is 1.2234 after one day it goes to 1.2453. That means price change 0.0219.

Now question how many pips maket moved.It is simple just multiply this by 10000.

It is 0.0219*10000=219 pips.

Pips is the plural number of pip.

But when you calculate for Yen related pair like GBPJPY or USDJPY.

Suppose Current price of CADJPY is 123.54 after one day price moved to 121.03.So total movement on price is 12.54-121.03=2.51.

In pips it is 100 fold that means 2.51*100=251 pips.

Now few Examples here

 

Pair

Previous Price

Moved Price

Pips Value

 

 

 

 

USDCAD

1.2765

1.3201

436

EURAUD

1.3401

1.2104

1297

AUDJPY

129.05

129.08

3

GBPNZD

1.8764

1.9203

439

CHFJPY

134.56

1.36.76

220

 

 

 

 

 

Spread

In Forex trading, brokers quote the bid and ask price for the currency pairs. The bid is the price that a trader can sell the base currency while the ask is the price they can buy the base currency. Spread refers to the difference between the two prices. Besides, this is how the “no commission” brokers- those who do not charge a separate fee on traders’ transaction make their money.

The spread is measured in pips. Most currency pairs- the base currency and quote currency have a pip value equal to 0.0001. For instance, take the following quote; EUR/USD = 1.1051/1.1053 the spread is 0.0002, which equates to 2 pips.

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