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I'm new to this and am trying to understand all the risks and benefits before getting too far in.

I recently grabbed MetaTrader 5 to play my hand at trading in forex, so far I've been doing very well. My demo balance started at 3k yesterday, and today I'm at 3.5k just from a couple trades in USDCAD. My demo account is set to 1:100 leverage ratio.

From the transactions in my history, I see that my gains and losses are directly related to the percentage the pair moved, in relation to my investment.

For instance, I bought in at $1.33468, and sold at $1.33652. I did volume of 1, which equated to $1000. In this case the increase of 0.13767% gave me an increase of $137.67 in my account. This appears to be a direct correlation between what I invested, and the increase + the leverage. So this part I get, I got my equivalent share of what was a favorable profit for the broker.

What I don't get is why they seem to be okay (in my limited experience) with keeping the same thing true when going negative. For instance had it decreased by the same amount that it increased instead. In that case I see that I'd only owe the brokerage the $137.67 that I lost... But they lost 100x what I did.

Am I just seeing this wrong? Are losses 10000x my part of the investment, and gains are 100x?

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  • "But they lost 100x what I did." Why?
    – D Stanley
    Jul 6, 2023 at 15:33
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    Brokerages do not lose when you win, or vice versa - they simply facilitate the transaction between you and another forex player.
    – D Stanley
    Jul 6, 2023 at 15:35
  • @DStanley "they lost 100x what I did" because they put up 100x more value than I did for the same transaction.... Right?
    – Nieminen
    Jul 6, 2023 at 15:41
  • I must be missing something fundamental here, and I can't get a clear answer from any search... Just did the calcs, and I got the full result from the transaction, as though I placed the full $100k. If that's the case, is the only benefit to the broker or whoever, the interest charged while I'm using their capital? Gains and losses are 100% mine, minus any transaction and interest charges?
    – Nieminen
    Jul 6, 2023 at 15:58
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    I'm not completely familiar with the mechanics of leverage in forex, but the broker is almost certainly offsetting their risk with positions in the opposite direction. That may be leveraged positions from other investors in the opposite direction, or through derivatives, but they are certainly not losing 1000X when you lose.
    – D Stanley
    Jul 6, 2023 at 16:17

1 Answer 1

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The risk that you won't be able to satisfy your debt after you lose more than you have in your account is what the broker takes on when letting you trade with leverage. Leverage is just a multiplier for your risk/reward.

Forex leverage can be quite high because currency movements are typically quite small.

There are protections in place to limit risk, you might trade with 100x leverage but you can't expose 100% of your deposited funds to 100x risk. There are margin requirements that will limit how much risk you can take on. Search for margin requirements on your broker's site to learn about initial and maintenance margin. Your brokers terms and conditions will also inform you of actions they will take if positions move against you. Typically you'll get a margin call (notice to deposit more funds to satisfy maintenance margin requirements) and if that is not satisfied timely they will manage positions for you to limit their exposure.

Wrapping your head around forex, leverage, and margin requirements all at once is a lot of info to digest, but there are a lot of solid writeups on each topic, this seems like a decent intro to forex leverage concepts: https://www.investopedia.com/articles/forex/07/forex_leverage.asp#:~:text=For%20example%2C%20if%20you%20have,account%20(100%2C000%2F10%2C000).

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