It is powerful and beneficial in Forex Trading. With 500:1 leverage, you are effective using $1 to hold 500 dollars. With 100:1, leverage will enable you to hold $100 using $1. This is nothing new to the finance industry but widely used for currency trading to use the dollar unit value of the currency.
It works with capital that funded the entry. The capital must be in currency value or cash to attain the leverage holding. This is similar to a derivative or contract for difference for stock and shares. Using money to leverage is much more potent than using physical assets, as it is harder to dilute and cash it again. Therefore, leverage is used by currency trade with capital at 100:1 leverage. This determined the one lot size of the 100k contract in forex. (For a mini lot, it is 0.1 lot of 100k contract).
One lot holds a 100k contract worth of currency in forex—this equivalent to $1k of capital used to hold a $100k contract worth of money. Since pip is used to show currency movement, 100k for one pip movement will work out to $10 a pip. (10,000 pips give 1 dollar, but it is a $100k contract).
For forex trading account, which gives 500:1 or 200:1 leverage, is different from currency trading leverage. Please don’t mix them up. The currency leverage is fixed on 100:1 for forex currency trading of 100k contracts. A mini lot is executed at 0.1 lot or 0.01 lot. For trading account leverage 200:1 or 500:1, this will determine your margin required to hold to perform the one lot of 100k contract. Using 100:1 is $1k. Using 200:1 is $500 per lot. Using 500:1 is $200 per lot. This, of course, with higher leverage, you can buy more lots. With a forex trading account leverage of 500:1, you can buy five lots at a total of 1k Fund.
This enables you to buy more with higher leverage, but the downsize is the drawdown, and the pips loss remains as per your trading lot of 100k contracts. So most money management software is using the mini lot at 0.01 lot or 0.1 lot to trade. ($0.1 and $1 per pip, respectively). Therefore do not mix up these two up. One is the 100k contract leverage for buy and sells, which is fixed at 100:1. And your trading account leverage which your Forex broker provides.
I end this topic by comparing the trading in stock and shares. Without this, you buy one share per 1 share price. with this, you can buy 100 times of the same capital. (Assuming share price is still the same as currency price, and 1000 shares equivalent to 1 USD per share.) with 1k capital, you can buy 1000 shares or buy one lot of 100k contract forex currency trade.
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