What is Leverage?
The volatility, which began at the beginning of the 1970s with the end of the Bretton Woods agreement, allowed swap-like derivatives to pass over. With the contribution of technology that develops day by day, besides banks and similar financial institutions, individual investors have the opportunity to trade easily with very narrow spread ratios in leverage derivative markets when it comes day by day. Starting in 2012, the forex markets in Turkey, which have developed especially in the last 10 years, started to be monitored by financial institutions providing the opportunity to trade in forex markets under CMB regulation, and interest of big and small investors who want to take advantage of the opportunity of higher volume transactions by leverage ratio started to increase.
LEADER FOR FOREX
Let’s go over an example to clarify the concept of “leverage” that is often used in Forex markets and seen as a risk factor
by investors. Suppose that Mr. Collin, who opened a forex account at Finance online FX with a leverage ratio of 1/100, deposited $1,000 as his initial deposit. The maximum position size that Mr. Collin can open with this guarantee is 100.000 USD (1.000 x 100). The maximum position size should be underlined here. Because of the trader’s trading platform,
the nominal size of the position opened on the order screen can also be seen, as is the value in lots. If Mr. Collin is trading in the USD / TRY range on MetaTrader4 platform, one of the most frequently used trading platforms for forex markets, he will open the 1 lot position by selecting the field “1” in the order screen. The nominal size of the position it opens is also 100,000 USD. Now, Mr. Collin’s account of 1,000 USD increases or decreases to include the profit or loss of a USD 100,000 position in the USDTRY price per pips rise / fall.
RIDDLE OPERATIONS RISK? FOREX TRANSACTIONS RISK?
Forex markets have high leverage ratios from time to time investors “hurry to forex risk a lot? “May be bringing the question to mind. However, leverage ratio and risk concepts may not be directly proportional to each other. To explain with an example; Mr. Sam opened a forex account with a leverage ratio of 1/1 to open an initial bond of 100,000 USD and wants to open a USD 100,000 position in USD / TRY.
To do so, he has to use the entire initial deposit to open up one lot (100,000 USD) position on the MetaTrader4 platform and there is no free back guarantee. However, if Mr. Sam had opened the forex account by choosing the leverage ratio of 1/100, then in order to open another 1 lot (100.000 USD) position, one thousand USD (100.000 / 100) bond will be left out of the initial 100.000 USD and the remaining 99.000 USD free guarantee , that is, security.
One of the well-known mistakes about leverage is high leverage = high loss. Actually, that’s not really the case. If we continue with the above example, the profit / loss of 1 lot position would be the same as if we had 1/1 leverage and 1/100 leverage with 1 lot position profit / loss received by Mr. Sam who opened forex account with leverage. The leverage does not affect the profit / loss to be less or greater, but only determines whether the initial margin is more or less.
LIMITATIVE PROCESSING SAMPLES
As we can see from our examples, we can open a high volume position with low leverage. The risk here is that investors should use high leverage to open up more positions. That is, if Mr. Sam continues to open positions with high lot ratios by saying that he has left 99,000 USD behind the 1 lot process that he has opened using 1/100 leverage, then the leverage ratio may start to pose a risk for investors. However, if Mr. Sam continues to take action in the direction of the strategies he has created and take his risk appetite without taking another position or open a limited position, he may wait for USD / TRY to keep his position for a long period of time, even if he anticipates moving. Forex markets and leverage opportunities can be a risk factor because the amount of money earned is directly proportional to the risk involved. However, adjusting this risk level is entirely at the discretion of the investor.