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How to Trade Forex: Understanding Leverage and Commissions

How to Trade Forex: Understanding Leverage and Commissions

You already know how to trade Forex efficiently and intelligently, right? Now it’s time to explore two concepts that are of utmost importance to the business. Here’s our quick and simple guide to comprehending leverages and commissions.

How to Trade Forex Using Leverage

Simply put, leverage is essentially the opportunity to handle and manipulate a substantial amount of capital without dipping into your own. All traders that are familiar with how to trade Forex effectively know that leverage is typically represented by a ratio. It is usually based on your broker’s imposed margin requirements. There are also a number of leverage ratio that’s based on the kind of account one has.

Let’s look at it in simpler terms. For example, if your own trade broker has required his trader to have at least a minimum of five percent margin in the account being used, the trader must, at all times, possess the same percentage as hard cash before he or she is allowed to proceed with the trade. This also lends truth to the saying that if you have a high leverage, it’s also riskier, given you might experience a loss of substantial amount.

Most traders use a rate of 50:1 as a leverage ratio. In other terms, this is a 2 percent margin.

Trading using leverage has its advantages. And, of course, it has also its risks. With the typical 2 percent and 50:1 ratio, a trader has the capability to trade at a maximum of 50 dollars for every single dollar available. This means that you can trade at least 50 times over your margin, a nifty tool for anyone who wants to gather a lot of resources quickly. But, if you lose this, and you don’t have an adequate level of margin, it can leave you bankrupt, and you may end up in a margin closeout situation, an event that makes sure you can cover losses. This is one of the most important things to keep in mind when you are learning how to trade Forex.

Based on knowledge and industry insight, it is important for traders to start with a small leverage first. Trading with a higher ratio is not for everyone.

How to Trade Forex On Commission

Forex accounts, unlike equity accounts, can work using commission. This is an excellent benefit for starting out. Why? Simple because equity accounts typically require a fee every time one makes a trading transaction. This is not a problem if you’re actually earning money, but if you’re at a loss, you’ll keep on shelling out until you have no more money.

So how do commissions work? Each account has a spread and this earns them the money they need to cover expenses.

Different forex accounts use different spreads. The most common one is usually 0.0005 (50 basis points). Make sure to choose someone that offers the most service and the lowest spread. Certainly, this will be an advantage as you get more into world of foreign exchange trading and learn how to trade Forex with confidence.

While leverage and commission are small parts in the larger puzzle that is foreign exchange trading, they have a pivotal impact in one’s trading practices and possible profit. Make sure to choose from a variety of account brokers before deciding on one.

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