How to understand leverage in forex trading

  • 2023/2/25 14:10:56
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  • forextradingsessiontimes

The word leverage is often found forextradingtime the financial sector, including the securities market forextradingmarket the foreign exchange market, the essence of which lies in the use of a small amount of money for a larger amount of buying and selling people who do not know much about financial trading may not imagine how to use a small amount of money for a high amount of buying and selling, this is because in the real world forex trading session times can not use a dollar to make a ten dollar transaction while in the financial market such transactions abound Forex trading in the Leverage is typical, take foreign exchange trading as an example to explain the specific embodiment of leverage: in foreign exchange trading we usually find a reliable foreign exchange trading company, and then in this company to deposit a certain deposit (margin), you can start buying and selling we take the U.S. dollar and the Chinese yuan for example the recent exchange rate of the Chinese yuan to the U.S. dollar in 1 U.S. dollar to 6 yuan or so we assume that the deposit we deposit is 600 Lets assume that the deposit we put down is 600 cashback forex and we are trading foreign exchange against the US dollar. Lets assume that the leverage we choose at this point is 10 times the leverage is 10 times the leverage, which means that we can trade 10 times the 600 RMB relative to the deposit we put down of 600 RMB, 6000 RMB and this type of trading is called leverage. We now put down a deposit of 600 RMB and choose 10 times the leverage to trade 6000 RMB at At the exchange rate of 1 USD = 6 RMB: 6000 RMB = 1000 USD At this point we have bought 1000 USD with 6000 RMB For the USD in hand we would of course like to see it appreciate, in other words we would like to see the RMB depreciate against the USD If at this point the USD in the foreign exchange market, as we would expect, appreciates against the RMB: 1 USD = 6.5 RMB At this point we In other words, if we deposit 600 RMB and use 10 times the leverage to complete the transaction, the benefit is 500 RMB, our return is 83% 6.510006000=500500500/600=83% But market movements may not always change as we expect. After buying $1000, we are also exposed to the risk of dollar devaluation. Suppose after $1000 arrives, the foreign exchange market devalues the dollar and the exchange rate to RMB becomes: $1 = 5.5 RMB at which point we lose 500 RMB 6000 - 5.51000 = 500 and this 500 RMB loss is naturally deducted from our deposit at which point The more leverage we choose, the greater the uncertainty we face. We may get rich overnight, or we may lose everything overnight. In this example, we are explaining the use of leverage in foreign exchange trading, and the use of leverage in securities trading is similar, so I wont go into details here. Among the five major investment banks in the United States, Bear Stearns and Merrill Lynch were acquired by JPMorgan Chase and Bank of America, Lehman Brothers went bankrupt, while Goldman Sachs and Morgan Stanley received financial assistance from the government on condition that they transformed from investment banks to bank holding companies behind the collapse of the five major investment banks on Wall Street, the excessive leverage in the use of funds, is also one of the reasons why the five major investment banks so unbearable JPMorgan Chases leverage ratio was as high as 28 times. Morgan Stanley was as high as 40 times