Leverage in Forex | 90% of beginners make this mistake when trading on margin
We have all seen while trading Forex that when you place a trade, you have entry stops, targets, and the number of units you want to buy of that specific currency. You click the buy or sell button, and something will appear on your screen indicating insufficient margin. This is a confusing message for most traders because, Let’s say you have a $1,000 account, and you’re trying to risk $100, and you think I should be able to bet $100 in the account, right? That’s not necessarily the case, depending on a few different factors.
How Forex Leverage Works?
Let’s say you have a trading account with $100. To make the math easier, let’s say you have 100 to 1 leverage on this account, and what this will do is give you 10,000 units of purchasing power. This is how we arrived at that 100 * 100 equals 10,000, so we have 10,000 units. I’m going to put BP, and that means purchasing power.ad
Margin has nothing to do with what you are trying to risk in Forex.
So, we have 10,000 units of purchasing power, and this is the first mistake I see many beginners making. They will have this situation: 100 dollars, 100 accounts for one leverage. They will be on the five-minute chart for the euro and the dollar as we are now. They will try to trade with a stop loss of 5 points.
It doesn’t matter what the goal is; they want to risk $10. They’re thinking to themselves, and you’re probably thinking right now, betting $10 on a $100 account. I should be able to do this if I wanted to. I don’t understand why this would be a trade I can’t do. Right, if that’s what you’re thinking now.
Let me explain a little more about how margin works. You have 10,000 units of buying power now with the account size and leverage, and you are trying to place a trade with a stop loss of A5 points and a risk of $10. The margin has nothing to do with what you are trying to risk in terms of $10.00 on a $100 account and more to do with the number of units you can control at any time your entire account, which in this case will be 10,000 units.
Find a stop-loss point in Forex.
And if we are trying to get a $10 stop with an A5 stop, what are we trying to do? We know that, hopefully, you know, and if not, here’s a little lesson for you: A mini lot or 10,000 units of currency is usually worth $1.00 per pip. So, in this case, if we’re trying to get a stop loss of 5 Points equal to $10.00 of risk, how many units of this currency will we have to buy for this situation to end?
All we’ll need to do is multiply this by two. We need this to be $2.00 per pip because to have a $10 risk on five pips from our stop loss, we need $2.00 per pip to equal a $10 risk, right? So, if 10,000 units are worth $1.00 per hole, then 20,000 units are what we need to buy to make this trade.
What is the solution to avoid Forex margin insufficient message?
We get the message that there needs to be more margin because you cannot hold 20,000 units of any currency or pair while you only have 10,000 units of buying power. Does this make sense? So, this is the number one reason your broker will reject you every time you try to make this trade. They say no because you are trying to use 20,000 units in an account where you can only have 10,000 units of purchasing power.
What is the reason for all this? Your stop loss is too small. You’re facing this situation because you have a stop loss that’s too small, and you’re trying to risk too much money with that slight stop loss. So let’s talk about how you’ll get the message that there needs to be more funds, more margin, whatever. It was what you call your brokerage firm because you’re trying to hold if you’re exposed.
Remember our risk now; we are only trying to risk $10.00, so it makes sense for most beginners that I should be able to bet $10 on a $100 account, but the other two steps are to figure out how many units I have to hold for the $10 risk to exist and in this case, That would be 20,000 units, which is what you’ll earn.
$300.00 account, 100 to 1 leverage, and 10,000 units of buying power. These 10,000 units are in your entire account. What I mean by that is 10,000 units in one position. Or you can get 10,000 units in five different positions, and they are all only 2,000 units.