How to prosper At forex trading - Leverage & K-Factor

How to prosper At forex trading - Leverage & K-Factor

One of the biggest reasons that forex trading is quite different from the animal stock or futures trading Forex is leverage. forex trading leverage can be enormous, as high as 400:1, and in most cases you can choose the amount of leverage or gearing want to Forex trade with.

Super high leverage is a selling point for many online forex brokers. How many times have you seen tout "control $ 100,000 of the $ 250 to the euro? These figures are correct, and, yes, the profit potential of super high power is immense.

This article neither encourages nor discourages forex trading in the super high power. It is a personal decision but a decision can only be done with reasonable professional understanding of all the implications of leverage and what it means to your chances of thriving in forex trading. It is probably fair to say that if you have a professional understanding of leverage that your chances of survival, even in forex trading is slim to none.

One of the basic conditions for forex trading is PIP. You will see that XYZ Broker application PIP 3 per contract or the currency XY pair has an average daily range of 100 PIP. We all know that the value of PIP is a variable that differs with each currency pair, but did you know that the value of a pip, also varies depending on current price of the base currency, and draw on your profile?

For example, EUR / USD at 1.2723 and 100:1 leverage on the amount of pip is $ 7.86. At 200:1 leverage value PIP doubles $ 15.72. For forex traders with different gearing in 100 PIP move means very different things for its own account equity.

Here's a new way to look at leverage with the "K factor". The three most common levels of leverage available from online forex brokers are 50:1, 100:1 and 200:1. The K factor for the 100:1 leverage ratio is 1. The K factor for the leverage ratio of 50:1 is .50, and the K factor of 200:1 leverage ratio is second

How can you use the K factor?

There are three ways to use the K factor. The first is using the K factor to calculate the value of PIP currency pair you are trading Forex.

Than 100,000 individual monetary units (usually dollars or euros) is the normal size of a lot we can calculate the value of PIP with this formula:

(100,000 / current price without decimal) * K factor = PIP

Here's an example: The EUR / USD at the current price is 1.2723 and your leverage is 100:1. With these facts formula is:

(100000/12723) * 1 = 7.86.

Value of the pip is $ 7.86. If your forex broker performs his Forex trade in the spread of 4 Pips will pay $ 31.44 for conducting Forex trade euphemism that the broker is going to be used for the "Commission". If your leverage or gearing is 200:1 that execution will cost $ 62.88.

The second way you can use the PIP and the K factor is to quickly determine the potential gains in Forex trade, or to know about security risks in real dollar stop-loss setting.

For example, if you go long EUR / USD at 1.2723 and expect to move to 1.2850 what benefit can be predicted in the 100:1 gearing?

12850-12723 = 127 * 7.86 = $ 998.22 PIP - cost performance.

If the objective set your stop loss at 1.2715 as the amount you are risking in this Forex trade?

12.723-12.715 = 8 * 7.86 = $ 62.88 + PIP execution rate.

The third way to use the K factor is to avoid what forex brokers call "safety net" and what I call "kill, but not Dismember."

Difference is not an advance. It's over-the-hand, your money, the broker uses to protect its own capital account from your mistakes. That's all well and good, since the global foreign exchange Forex market will continue to work only if all participating brokers have adequate capital to meet settlement obligations to their customers.

If losses from current open positions cause the equity in your account fall below that required to maintain the total number of open positions, trading Forex platform the broker will immediately close all open positions, even if unrealized loss of any individual position is quite small. Your loss is the aggregate number of PIP position * K + carrying cost factor. In almost every case it is just about everything in your profile. This is a safety net because the broker is not going to lose more money than you had in your account (which may happen with good futures accounts.)

The formula is:

(Starting balance - open position losses) / (($ 1,000 / K factor) * No Open Positions) -1