Understanding leverage in Forex trading
Forex leverage is believed to involve high risk because it is assumed to amplify the potential profit or loss process that trade may cause. This is how an amateur trader views Forex leverage, in fact, this description is wrong. In fact, leverage is a very effective use of trading capital and is appreciated by professional traders as it allows them to trade and execute larger-sized deals and less capital.
What is the leverage?
Leverage refers to the percentage value of the financial positions that you obtain with borrowed money in order to amplify your returns. Margin is the actual cash portion of your position (the transaction). It is a deposit that provides collateral separately from the total value of your account. We can consider it as a reserve against the loss and cover the process of repaying the borrowed money. In the Forex industry, leverage and margin are just two ways to display the amount of borrowed money that is used to inflate your gains or losses knowing that leverage increases your chances and risks simultaneously.
For example, using a leverage of 1: 100 means that you use 1% of the total available margin value, i.e. 100 out of an amount of $ 10,000 for an open position, meaning that an amount of $ 100 will allow you to control the total amount of a transaction of 10,000 in euros / The US dollar, or vice versa, the US dollar/euro. Using a 1:50 leverage means that you use 2% of the total available margin, meaning that an amount of $ 100 will allow you to control a total transaction of 5,000 on the EUR / USD or vice versa, the USD / EUR.
Leverage in Forex does not change the potential profit or loss that a trade can cause. Instead, it reduces the amount of invested capital that should be used, and thus the disclosure of the capital to benefit from in other trades. For example, a trader who wants to buy a thousand shares of shares at $ 20 per share may only need $ 5,000 of invested capital, which is supposed to be estimated at $ 20,000, leaving the remaining $ 15,000 of the amount available for additional trading. This view is the way in which a professional trader views leverage in Forex trading, and of course, this method is 100% correct.
Continue reading to get more information or start trading in a risk-free demo trading account so that you can understand how leverage works and its importance in Forex trading.
Is leverage in Forex trading: a big risk or a bonus?
Leverage is a double-edged sword that can work for you or against you. The ease of access to leverage in Forex trading and its abundance is what attracts risk seekers and keeps the investor who hates risk. Leverage in Forex trading is not something that we can, by its nature, be a good or a bad thing in and of itself. Like a car or rearm, if you get adequate training it will consist of using it safely and effectively and increasing your skills in the process of self-control, and with the passage of time, you will have the common sense necessary to exercise without harming yourself. And any of the above, if the leverage user is not fully aware and has the ability to adapt to the leverage, he must trade on a test trading account in order to be able to master this weapon, otherwise, the results may be disastrous and heinous.
Understanding leverage in Forex trading is one of the main characteristics that separate future winners or winners from the group of eternal losers.
In fact, professional Forex traders use leverage on a daily basis in their daily trading as leverage provides effective use of invested capital management, there are many advantages and benefits in the process of using leverage in Forex trading, and there are absolutely no disadvantages that the right to say, as The leverage available on the Forex market is not present and offered within other markets.
Leverage also allows traders to trade in Forex, Index, or Stock contracts in an acceptable manner. However, the only thing that the use of leverage in the trading process provides and the most important characteristic of it is the lack of increased trading risk. What we want to say is that the trading process using leverage does not include any risk as is the case in the cash trading process, as long as you control the risk process for each trading process you perform (from 1 to 3 percent) by controlling the size of the appropriate contract.
How margin interacts with contract size and leverage:
Again, the margin in the Forex industry is the minimum percentage of the monetary value of the position your broker asks you to allocate for each trade. Margin and leverage in Forex represent two different sides of the same feature, and this was calculated due to the small amount of cash you need to control one contract (1 lot), a small contract (0.1 lot), or a micro contract (0.01 lot).
For example, using a leverage of 1: 100 or margin requirements of 1 percent means the same thing in the Forex trading process. That is, you need $ 100 to control $ 10,000 for a particular currency pair, which is equivalent to a small contract (0.1 lot). Every 1% price move will bring in a gain or loss of $ 100, you will need $ 500 to control 5 contracts, and therefore every 1% price movement will bring in a profit or loss of $ 500.
Let us take a practical example of Microsoft’s stock. Let's assume that the current price is $ 140.00 per share, and if we assume that you have an investment account with AM Broker with a balance of $ 1400, and you intend to invest in this stock after expectations from the stock market indicate a rise in the price of this share, then you The number of shares that you can buy will be 10 only due to the invested capital (1400 capital / 140 share price = 10 number of shares) but with the use of leverage, you may be able to multiply your investment to ten times and buy instead of 10 shares you will buy 100 shares and achieve more gain.
The higher the leverage or the lower the margin in the Forex, the greater the percentage of profit or loss for each price movement by 1%, which in turn will also affect its effect by increasing the return size and the amount of risk. Your minimum margin is not known to be your maximum possible loss. Instead, the minimum margin is the minimum amount that you need to open a position and keep it open. If the price moves against you, your broker will automatically allocate more cash and increase the margin deposit to cover this decrease in your Forex account.
The maximum loss in each trade depends on where you set your stop-loss order (described in the section on order types later), the size of your position (the contract), and whether you have enough money in your account to cover that loss, except that a broker Your trading will close your positions to prevent your account from going to zero without even referring to you, via what is called the Margin Call concept or name.
Understand the patterns of Japanese candles in Forex trading:
To understand the content of any book, you must be able to read words. To understand a musical note, you need to be able to read notes on it. To understand price behavior, you must be able to read charts and be able to interpret them. Therefore, let us review and learn one of the most important pillars of technical analysis, which explains candlestick charts and patterns.
Analysis and meaning of Japanese candles
The chart comes in various forms, but we will focus on the Japanese candles or the candlestick chart, which has become by far the most popular because it provides the fastest visual understanding of the price movement and market sentiments alike. Articles and publications abound about many of the advantages of the candlestick charts and why they have become Methods of dominant Japanese candlestick charting Since it was first introduced to the West by analyst Steve Neeson in 1989, his great book has been very popular in Japanese candlestick techniques, nearly a decade later. However, we'll take an overview of everything you need to know to make money in Forex trading.
Understand the candlestick charts:
First, examine the parts of the candle as a whole, as shown in the figure below.
The pattern is clear in itself, but here are the key points for understanding Japanese candles:
Candles usually have a body and a tail (called a shadow) from both ends, however, some of these parts may not be present in some candles as we will see below. The candle covers the entire price range during a specified period. The body alone represents the range between the open price and the closing price for a specified period, while tails, or shadows, display the upper and lower price ranges.
Each candle displays all price information: the highest price, the lowest price, the opening price, and the closing price for a specified period, depending on the time frame of the chart. Here are two examples of candlestick patterns:
1. Each candle in the 1-minute chart represents information and displays the opening and closing price, the highest price, and the lowest price in a minute.
2. Each candle on the graph represents a full day and displays price information for a full day.
Any good trading platform should provide a candlestick chart from one second to one month.
The inside of the candle tells us the price direction for the specified period. The most common color coding is the green for a high price closure and the red for a low price closure.
The relationship between the body of the candle, the tail, and its signs
Body length and tails have a correlation with the absolute value between each other, as within a certain period of a candle you can tell us a lot about market sentiment. Japanese candles covering longer periods will be more important to understand the direction of the markets and give better analysis, especially candles covering the entire day, week, or month periods. As with any technical indicator, where the Japanese candlestick patterns that cover short periods of time have a less important effect and the reason behind this is that the Japanese candles that cover the price movement for a period of less than one day do not give a clear reading of the real market sentiments and the reason for their formation may be the result of speculation Or random money flow.
Here is the key to understanding the relationship between tail (or shadow), body length, and the meaning of an individual candle:
The greater the length of the tails compared to the length of the body, this means an increase in conflict and an increase in the size of the confrontation between buyers and sellers, and it is likely that the current trend will stop or reverse.
The shorter the length of the tails compared to the length of the body, the higher the up or down movement, and the more likely the movement will continue in the same direction.
When we see Japanese candles with a long body for a high closing price with little or no tail, this is an indication that the number of buyers is more than the sellers and they controlled all the period covered by the candle, which pushed the price to the upward direction with full stability, and the longer the body of the Japanese candles Whenever this indicates purchasing power.
When we see Japanese candles with a long body for a low closing price with little or no tail, this is an indication that the number of sellers is more than buyers and was controlling all the period covered by the candle, which pushed the price to the downward direction with all stability, and the longer the body of the Japanese candles, Whenever this indicates the selling power.
When we see Japanese candles with a small body in terms of length compared to the length of the candle's tails, this indicates a kind of confusion to understand the current trend, if the color of the body is red, indicating that the sellers are stronger than the buyers, and if the color of the body is green, it is the opposite.
Low tails in the appearance of Japanese candles
The relatively low tail in the Japanese candles indicates strong pessimism and a reversal in sales with orders increasing when the deal price falls, and sellers take profit. In other words, a low price level was tested and the price reversed after that, which stopped the price falls.
The short tail is read from the bottom side in the Japanese candles, as it is a lower price test, and a lighter pressure in sales orders, which requires a few buyers to reverse the price, if the currency pair closes at the lowest price level reached by the time period covered, it will not be For the shape of the Japanese candles any bottom tail.
High tails in the appearance of Japanese candles
The relatively high tail in the Japanese candles indicates strong optimism and the reversal of purchases with the increase in sales orders when the price of the deal increases and buyers take profits. In other words, test a high price level, and the price reverses after that, which halted the price increase process.
The short tail is read from the upper side in the Japanese candles, as a less price test, a lower struggle The short upper tail shows a lower degree of hesitation, a lower test for high prices, and less conflict between buyers and sellers. If the closing price is the highest price reached by the market for the period covered, then the shape of the Japanese candles will not have any upper tail.
Keep reading the Japanese candlestick patterns introduction or start trading in a risk-free forex demo account and deal with it in real-time.
Introduction to Japanese candlestick patterns
Japanese candlestick charts mostly appear within the graph of puzzling reversals or fluctuations (for example, a potential reversal), while western chart patterns tend more around signaling that the trend continues (or the trend pauses before resuming) or a reversal. Japanese candlestick is a wide subject. Our goal here is to provide you with the most important thing.
Note that the table classifies Japanese candles and patterns as bullish, bearish, or neutral. The "bullish" characteristic indicates the Japanese candles that show an increase in prices or patterns, and that indicates that the price will rise as buyers attack their opponents with an upward movement. A "bearish" characteristic indicates Japanese candles that show a decrease in prices or patterns that indicate that the price will decrease as sellers attack their opponents with a downward movement.
1. Patterns for individual Japanese candlestick patterns
Spinning Top Candle Bottoms:
The pattern of spinning tops and bottoms is considered a pattern of Japanese candlestick patterns, and it depends on the closing state, whether the closing is up or down, the importance of this model increases in the event of a movement in the opposite direction of the close.
The spinning Tops model indicates the confusion in the movement of the markets, and the opening and closing price are closely related as the buyers and sellers are equal to some extent.
Depends on whether the closing is higher or lower. The importance increases if an extended movement occurs in the opposite direction of the closure.
In this example, the first candle with a dark color Spinning Top showed a downward trend and this indicates that the percentage of sellers has become weak and mostly that the price will reverse and rise, and the second candle with a light color has shown Spinning Top with an upward trend and this indicates that the percentage of buyers has become weak and in Mostly, the price will reverse and decrease.
The Doji model is a Japanese candlestick pattern and it is a neutral pattern: buyers and sellers are equal in equal measure, and the uncertainty increases. The opening price is the same closing. The Doji model is of great importance when found after a long move up or down because it indicates that the movement may end and may reverse and go In the opposite direction.
White Marubozu - Bullish / Black Marubozu Momentum Candles:
The Marubozu momentum model is a Japanese candlestick pattern that represents the strength of the movement, as it appears more decisive, and the control of one of the two camps shows buyers or sellers more clearly, the dark color indicates that the sellers are in control and usually this indicates achieving more highs, and the light color Indicates the opposite.
Hammer - Bullish / Hanging Man - Feather Candle:
Hammer model and Hanging man model are typical of Japanese candles and they have the same shape: long lower tail, small or no upper tail, the ratio of length is twice or three times the length of the body.
They work in the opposite way:
Hammer Hammer pattern: This pattern is usually formed after a bearish move and indicates the potential for a price reversal higher.
Hangover Man Hanging Man: This pattern usually forms after an upward move and indicates possibilities in price reversal lower.
In either case, the closing price, high or low, is of no importance.
Inverted Hammer - Bullish / Shooting Star - Bearish Inverted Hammer Candle - High / Low:
Inverted Hammer and Shooting Star models are Japanese candlestick patterns and share the same design. They are inverted shapes of Hammer and Hanging Man shown above. These models have a long high tail, a small tail low and two and three times smaller than the length of the body. As usual, as usual, it needs to move up or down to achieve reflection and confirm the pattern.
They work in the opposite way:
It occurs after a downward movement = The Inverted Hammer pattern indicates that the markets have reached the bottom, confirming their rise.
It occurs after an upward movement = Shooting Star, bearish, indicates that the markets have reached the top, confirming their decline.
In either case, the closing price, high or low, is of no importance. Although it is in the opposite direction of the previous candles, it indicates slightly more to stop or reverse the previous candles.
The last words
In other words, the presence and abundance of leverage in Forex. It means that professional traders have chosen to trade in higher-yielding markets rather than smaller ones. Notifying new traders to avoid trading using leverage means that they are mainly motivated to trade as amateurs rather than trading as professionals.