Spread, Margin and Leverage
Spread is the difference between the selling price and the buying price of the currency. Spread is the distance between the price of the Bid and ask, which is 3 pips. So every time you open a sell / buy position on the EUR / USD pair, you must infuse the 3 pips first.
For example, when you open a EUR / USD buy position at the ask price 1.3203. Then on the terminal note it will appear -3 Pips first. Each pair has a different spread, usually the smallest spread in the EUR / USD pair or other major pairs.
Pairs in the Forex Market
For trading, the smaller the spread means the easier you get profit. For that, choose brokers who have policies with low but high quality spreads. To choose a qualified broker, we will discuss it in the next material. But you also should not be fooled by bidding with small spreads. Read in advance the broker’s policy if the spread enlarges when approaching certain moments. Choose a broker who has a policy of not widening the spread too big when there is a big news to be released.
Understanding Leverage and Margin
Leverage as well as levers. Usually in normal ratios like 1:50, 1: 100, even the most competitive are brokers who provide leverage 1: 2000.
Another example: You have a capital of $ 500 and use an account with 1: 100 leverage. If you want to open a Buy position using a mini lot account (10,000). The margin held by the broker is 1% of the Lot. Contain the size (10,000 X 1%), which is a margin of $ 100. This means that the capital held by the broker as a temporary guarantee is $ 100.
Benefits of using leverage
The advantage is that with small capital you can trade using a larger number of contract size lots.
Leverage Function Against Margin Resilience
For example, your initial capital deposit is $ 300. If you open 1 mini lot trading position (10000) requires margin: 10000 (mini lot) x 0.002 (leverage 1: 500) = $ 20. Then the capital is temporarily held as collateral (margin) to open 1 mini lot gbp / usd is $ 20. So your remaining margin for holding loss is: $ 300 – $ 20 = $ 280.
The profit from the GBP / USD currency for mini lots (10000) is $ 1 per point (pip). So with the example above (the remaining margin is $ 280) you can calculate your strength to hold loss is $ 280 (the remaining margin) divided by profit per point (pip) = 1, namely: 280/1 = 280 points. So the power to withstand maximum loss (before a margin call) is 280 points assuming the currency you are using is GBP / USD with a profit of $ 1 / point.
Compare with 1: 100 leverage which means you have to provide a capital margin of 10000 x 0.01, which is: $ 100 to open 1 position of mini lot (10000) currency GBP / USD. The remaining margin to hold loss is 300 – 100 = 200. The profit per point of the GBP / USD mini lot is $ 1. So your strength to hold loss is 200/1 = 200 points.