To start to understand about leverage or gearing in forex and contracts for difference is really a function of how much equity you have in your account in relation to the position sizes you are trading.
So for instance when your leverage is set 100 to 1, in practice this is the maximum leverage that your forex broker will allow you and not necessarily the leverage that you are using.
Also, you need to know what the contract size is on the platform you're trading on. On some forex platforms one contract could be equivalent to 100,000 whilst on others one contract equals 10,000 and on some others one contract is just 1,000 of the base currency.
So to get this into perspective let's assume that you are trading on a forex platform where one contract equals 10,000 of the base currency.
Keeping this in mind let's assume that you open one contract of USD/JPY. Assuming you have $10,000 in your account and you open one contract which also equals $10,000, you are trading with no leverage here at all. This holds even if your account is set to 100 to 1 because that's only the maximum leverage which you have at your disposal (but you have used none).
Now let's assume that you open two contract, you now have a $20,000 position on a $10,000 account so this equals leverage of 2 to 1.
However, when day trading there is another variable that is even more important that the amount of leverage you are utilising and that is the amount you are risking per trade as a percentage of your account balance.
Alternatives to online forex dealing include spread betting or CFDs which mechanisms can be more straightforward than traditional forex dealing but we will write about these tools next time.
So for instance when your leverage is set 100 to 1, in practice this is the maximum leverage that your forex broker will allow you and not necessarily the leverage that you are using.
Also, you need to know what the contract size is on the platform you're trading on. On some forex platforms one contract could be equivalent to 100,000 whilst on others one contract equals 10,000 and on some others one contract is just 1,000 of the base currency.
So to get this into perspective let's assume that you are trading on a forex platform where one contract equals 10,000 of the base currency.
Keeping this in mind let's assume that you open one contract of USD/JPY. Assuming you have $10,000 in your account and you open one contract which also equals $10,000, you are trading with no leverage here at all. This holds even if your account is set to 100 to 1 because that's only the maximum leverage which you have at your disposal (but you have used none).
Now let's assume that you open two contract, you now have a $20,000 position on a $10,000 account so this equals leverage of 2 to 1.
However, when day trading there is another variable that is even more important that the amount of leverage you are utilising and that is the amount you are risking per trade as a percentage of your account balance.
Alternatives to online forex dealing include spread betting or CFDs which mechanisms can be more straightforward than traditional forex dealing but we will write about these tools next time.
