Foreign Exchange Singapore Leverage Risks

Posted by admin 28/10/2013 Comments are off 732 views

Foreign Exchange Singapore Leverage

This article looks at the risks you would encounter if you were to use high ratios of leverage in foreign exchange Singapore trading.

The high leverage that is offered in the foreign exchange Singapore market is the reason why so many traders are attracted to it.  It offers them the opportunity to make huge profits.

What is Leverage?

Leverage can be viewed as borrowing from your broker to make an investment.  For example, let’s assume that your broker requires a 1% margin value and you are trading in standard lots which are equivalent to $100,000.  This means that the margin you need is $1,000 and your leverage ratio is 100:1.  You should consider the real leverage that you will be using, not the margin-based leverage.  Your risks are not always affected if you use margin-based leverage.  The bottom lines of your trades are not affected whether it is required that you deposit 2% or 4% of the trade value.  This is because you can make the decision on the amount you wish to deposit into your account.

To calculate the real leverage you are using, you divide the face value of all your open positions by the balance you have available in your trading account.  For example, if your account balance is at $5,000 and you are trading a standard lot of $100,000, the leverage you are using is 20 times that of your trading account.

Leverage Risks in Foreign Exchange Singapore

You have the opportunity to dramatically improve your profit level by making use of real leverage.  You should also be aware that it boosts the level of losses you could suffer.  The higher your leverage, the more at risk you are.  When you use margin-based leverage, you are not at as much risk, but your trading account balance can be affected drastically if you do not use leverage with care.

Below is an example of the use of leverage in different ways.

Trader A and trader B both have $10,000 in their trading accounts.  The requirement by their broker is that they maintain 1% margin deposits.  They both decide to trade the USD/JPY after having done their analysis which indicates that the pair is slowly reaching its highest level and will soon suffer a value decline.  They both make the decision to short the currency pair at 120.

Trader A decides to make use of leverage of 50:1 by shorting $500,000 on this currency pair.  As the currency pair is currently at 120, a single pip movement for one standard lot would be around $8.30.  This means that for five standard lots the pip value would be around $41.50.  If this currency pair was to increase to 121, trade A would suffer a loss of 100 pips on his trades which will amount to a loss of about $4150.  This is a huge 41.5% of the balance in his trading account.

Trader B is a more careful trader and decides to use leverage of 5:1.  He makes the decision to short $50,000 based on the value of $10,000 in his trading account.  This trade is only half of a standard lot.  In the currency pair was to increase to 121, trader B would make a loss of 100 pips on the trade which is equivalent to $415.  This is representative of 4.15% of the balance in his trading account.

By using smaller leverage ratios, you allow more movements in your trades.

 

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