To make money in forex trading, you need to have more correct speculations than incorrect speculations. Yet there are a few simple things to get your head about before realizing this.
The foreground of this is to be able to compute or calculate the profit and loss numbers. If you will not do it, you will not have a clear understanding whether your trading efforts are successful or not.
Here are some of the ways you can compute your profit and/ or loss in forex.
When you join a trade online, you have to let the broker be acquainted with how much money you want to stake. The overall rule is that you must never risk over 1% of your whole bankroll.
In simple words, if you have $2,000 with the forex broker of your choice, then you must avoid staking greater than $20 in just one trade. This is where many forex beginners fail – they tend not to follow the basic principles in risk management.
On the contrary, it’s practically impossible to make trading a full- time living with small stakes. In any case, a gain of $20 (2%) will only make you 40 pips. Consider how many successful trades you have to make just to make the ends meet.
Providently, with the help of margin and leverage, you can considerably increase the amount of your stakes.
Loss and Profit In Percentage Terms
Focusing on percentages is the most effective way when it comes to price actions in pips. In doing this, you will be able to easily evaluate your possible profits or losses.
As a matter of fact, the best brokers online show everything in terms of percentage. For instance, suppose that the EUR/USD goes from 1.1690 to 1.770. Surely, you wouldn’t tell its amount in terms of percentage. But, your broker will automatically show this figure. To be clear, this converts into 0.67% increase.
Margin and Leverage
The margin and leverage are the very important part of forex trading. In short, leverage lets you trade more money than what you have in your trading account. Simply, it will boost your stake by a factor which is predefined.
For instance, assume that you stake $20 on USD/JPY trade with a leverage of 1:20. This indicates that you are efficiently trading with 20x more than the original stake, which means you are taking the position of $20 to $400.
Leverage is very beneficial. It allows you to amplify your capital which will result in making more money from your lucrative positions in the forex market. Yet, you must remember that leverage is like a two- edged sword, which means that if it can increase your earnings, it can also increase your risks or losses.
Margin and Liquidation
To be able to perform a leveraged trade, you must put up a margin. This is basically a safety deposit just in case your tarde goes wrong. Take the example from above where the $500 stake let you trade with $10,000, as you used the leverage of 1:20.
Intrinsically, the margin was $500 or 5%. This matters because if the trade moves in opposition to you by 5%, the broker will have no choice but to automatically close the position because the margin balance has already been spent. Consequently, the broker would keep the whole margin of 5%. That is branded as being liquidated.
Adding more funds to the balance of your margin will avoid you from being liquidated.