How to Use Leverage in Forex Trading to Great Results

When you perform a Forex trade, you buy a certain amount of currency, called a lot. The amount of currency in one lot depends on the type of account you have. Forex trading accounts are leveraged, which means you don’t have to own that much expensive currency; you just have to control it, and if you do, any profit it makes is yours. To gain control over a large amount of money, you put a much smaller amount in a rental agreement called a security deposit. In a standard account, to control the $100,000, you must take out $1,000 of your own; in a mini account, to control $10,000, you need to deposit $100.

Leverage also affects the amount of profit you earn. In a Standard account, one pip equals $10 for a USD-based currency pair; in a Mini account, 1 pip equals $1. This means that if you correctly forecast the market movement and execute a trade that earns you 200 pips (not an unrealistic target), your profit will be $2,000 if you have a standard account; if you have a mini account , it is $200.

To maximize your profits in Forex trading, you do not have to trade a standard account; not every novice trader can afford it. Conversely, if you think you have a good market forecast, you can trade long lots. Continuing the example above, if your successful trade earned you 200 pips and you bought 5 lots of currency, then in the mini account you would invest $500 but make a profit of $1,000 (200 pips multiplied by 5 is a lot of). In a standard account, you would deposit $5,000 and earn $10,000.

The number of lots you can trade depends on the margin in your account. That’s not the amount you deposited; this also includes any open trades you make, taking into account any profits or losses you may incur.

There are two types of orders that can be placed in Forex trading. The most common type is called a market order, which simply buys or sells a currency pair at the prevailing market rate. This kind of trade is arranged quickly through some online trading platforms, and in the case of rapid changes in the market, the order can be placed with one click. (If you’re doing a one-click operation, always edit the trade to set a stop loss; more on that later.)

Another type of order, called a pending order, is used when you want to buy or sell a currency pair, but only at a specific price. For example, let’s say GBP/USD is range-bound, moving sideways in a channel, moving up and down, but not enough to entice you to trade.

But there are signs that cable may soon break out of the channel. Therefore, you can place an order to buy, but only if the price rises above a certain point. If the cable breaks, your pending order will be triggered and you will buy the pair when the price is above your predetermined point. If not, you are not stuck with a currency pair that has nowhere to go, and pending orders that are still dormant will be cancelled after a certain time.

A stop loss, also known as a stop loss, is a prearranged point at which you decide to exit a losing trade. The limit price, also known as the take profit, is the prearranged point at which you decide to exit a profitable trade. Although it may not seem that important on the surface, both are important. Proper use of stops and limits defines your level of risk and encourages disciplined trading.

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