Many beginning traders don't fully understand the concept of leverage. Basically, if you have a start up trading capital of $5,000 and if you trade on a 1:50 margin you can effectively control a capital of $250,000. However, a two percent move against you and your trading capital is completely wiped out. If you are a beginning forex trader you should not use more than 1:20 margin until you get comfortable and profitable and then and only then you can attempt to use higher margins.
What does 1:20 margin mean? It means that with your $5,000 you will control a capital of $100,000. Let's say you are trading the currency pair EUR/USD and by using our entry strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against Euro.
Let's say current EUR/USD rate is 1.455. Again, if your trading capital is $5,000 and you are using 1:20 leverage you will effectively be exchanging $100,000 to Euros. If the current rate is 1.455 you will receive 100,000/1.455 = 68,728 Euros.
If the trade goes in your direction margin will work in your favor and 1% decline in USD will mean 20% increase in your start up trading capital. So if EUR/USD rate moves from 1.455 to 1.469 you will be able to exchange your 68,728 Euros back to $101,000 for a profit of $1,000. Since your start up trading capital was $5,000 it is effectively a 20% increase in your account. However, if the trade went against you and USD appreciated 1% vs. Euro your account would be reduced to $4,000.
