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One of the major differences between FX (foreign exchange margin trading) and stock investments is that FX allows the use of leverage. In addition, foreign FX firms can use high leverage, which is different from that in Japan. In this article, we will tell you what leverage is, how much difference it actually makes when using an overseas FX firm, and the advantages of high leverage.
Contents
The Meaning and Effects of Leverage
What is leverage?
Leverage is the principle of leverage. Just as leverage can turn a small amount of power into a large amount of power, leverage allows you to make large trades with a small amount of money. In other words, you can trade dozens of times your actual capital, or hundreds of times if you use an overseas FX broker. The reason why this kind of magical trading is possible in FX is because FX is "margin-settled". Margin trading allows the FX firm to balance the risk without receiving the total proceeds of the position, since the position is closed when the trader's loss reaches the margin. So you can trade with less money than you actually have. By effectively utilizing this leverage, traders can multiply their FX profits by tens or hundreds of times. This is one of the great attractions of forex.
Margin requirements for actual overseas FX vendors
Let's check how much the margin requirement differs depending on leverage in USD/JPY (USD/JPY). The base currency is 10,000, but let's use 100,000 to match the foreign FX vendors. If leverage is 1x, you would need 11,200,000 yen to trade 100, 000 currencies. This is a very large amount of money, and as expected, the hurdle is too high for this amount. It is difficult for an individual trader to afford it. Domestic leverage is regulated to a maximum of 25x as of April2019. What if we take the maximum leverage of 25x? With 100,000 yen, the margin requirement is 448,000 yen, which means you can trade 11.2 million yen with 450,000 yen in capital. How about an overseas FX firm? Let's take the standard account of " XM " as an example, which is the most popular overseas FX company among Japanese traders. The maximum leverage here is 888 times. Then, the margin requirement to trade 100,000 currencies is 12,613 yen. It is amazing that you can trade 11,200,000 worth of currency with only 13,000 yen. How do profits change? Since the margins are so different, it would seem that profits would also be significantly different, but in fact they are the same. Even if the margin requirement is 11,200,000 yen at 1x leverage, 448,000 yen at 25x leverage, which is the limit in Japan, or 12,613 yen at 888x leverage using XM, a 1 yen change in the exchange rate will still result in a 100, 000 yen profit (or loss). If the exchange rate changes by 1 yen, the profit (or loss) is still 100,000 yen.
Advantages of high leverage to start forex with small amounts
Risk management.
In other words, to earn 100,000 yen profit, you need about 450,000 yen in Japan, but with XM, you can save about 13,000 yen. The fact that you can start forex with a small amount of money means that you can hold more positions for a larger surplus.
If you have 450,000 yen in capital, you can only trade 100, 000USD/JPY in Japan, but with XM, you can trade 30 times as much, or 3,000, 000 currencies. Naturally, the profit will also be multiplied by 30, so a ¥1 fluctuation will result in a profit of ¥3,000,000. Of course, you need to adjust the amount of positions you hold, taking into consideration how much unrealized loss you can withstand. If you cannot withstand unrealized losses, you will be forced to take a loss cut. However, if you are expecting ultra-high returns, there is no doubt that foreign FX companies are well equipped to meet them. Incidentally, we have seen cases where people mistakenly believe that "high leverage is dangerous," but this is actually not the case. For example, if you have 450,000 yen in capital, which is more risky, to allocate all of the 450,000 yen to the margin requirement at 25x leverage or to allocate about 13,000 yen of the 450,000 yen to the margin requirement at 888x leverage and leave the rest as surplus? If all of the margin is allocated to the margin requirement, a forced loss cut will be imposed immediately if the exchange rate moves in the opposite direction. Surplus money is also important in forex trading. Conversely, if only 13,000 yen out of 450,000 yen is allocated to the required margin, there is a surplus of more than 430,000 yen. Even if the exchange rate fluctuates by 4 yen contrary to the forecast, if you have such a large surplus, you can bear it and wait for the exchange rate to reverse. If you make good use of high leverage, you can trade with much less risk than with domestic FX firms. This is important "risk management" to win in FX.
EAs that take advantage of the amount of funds can be operated with a small amount of money
The benefits of high leverage also apply to system trading using EAs. Basically, when you trade with a system, you need more money than with discretionary trading. The story changes depending on what kind of EA you use and what settings you make, but since there are more entry points, you will have to hold more positions, which will increase the margin requirement. If you try to trade with a domestic FX firm, you have to prepare a large amount of money because leverage is regulated at 25 times. This is a good advantage of XM. Thus, whether you "seek high returns" or "want to trade with risk management," high leverage can accommodate your needs. In other words, "the possibility of winning at Forex increases" when trading with high leverage. We hope you will make the most of the high leverage of foreign FX companies to increase your valuable assets.
