What is forex reserve
The key to the popularity of Forex is its reserve. Without it, the exchange would not be available
to the average investor. So, what are these reserves and how do they work? About this should
know each and every beginner trader, same as already experienced onces.
Forex reserve accounts allow investors to control large amounts of currency with a relatively
small deposit. Creating such an account with a Forex broker allows you to borrow money from
him for the control and management of currency lots, the cost of which, as a rule, is up to $
100,000. Borrowing capital goes to your reserve account, and thus creates a financial leverage,
which is usually expressed in a ratio, for example 100:1 and means that you can manage the
value of assets 100 times of your deposit.
In Forex, this means that with a 1% backup account you can manage currency lots of $ 100,000,
even though your deposit is only $ 1,000. Trading on reserve funds increases both profit and
loss, and it is possible that the investor may lose more than his initial contribution. However, if
there are adequate guarantees, the loss can be limited, in addition, brokers usually break a deal
that goes beyond the deposit.
Advantages of financial leverage
As mentioned above, trading using the reserve gives you more purchasing opportunities and the
potential for multiplying profits. How does it work? For $ 1,000 (your deposit), 1% of the
reserve account allows you to control the batch of currency at a cost of $ 100,000. When dealing
with $ 100,000, small changes in prices can bring a huge profit or loss.
Currencies on the Forex market are sold in much smaller units than cash. The US dollar, for
example, is quoted in units with four digits after the decimal point. Instead of abbreviated $ 1.24,
we see $ 1.2431 on the stock exchange. The smallest unit of Forex currency is called "pip", and
if you make a turnover of $ 100,000, each pip of your investment will cost $ 10 (when trading
If the price of the US dollar changes from 1.2431 to 1.2531, it means that there is a difference of
100 pips, which is a profit or loss of $ 1,000. Without reserves, with an investment valued at
only $ 1,000, price changes from 1.2431 to 1.2531 make up the difference of only $ 10. This can
be a significant amount for the tourist, but not for the investor.
Thus, using reserves, you can increase your potential profit.
Risk Limiting Tools
Since there is a possibility to multiply the profit, there is also a possibility of increasing the
potential loss. If you are careless, all your reserves can quickly disappear. When the deposit is
1% of the reserve account and changes in currency have occurred for one cent is not in your
favor, you will lose $ 1,000.
In Forex trading, however, there are several methods of limiting losses. Setting abstinence from
loss automatically closes your position if the value of currency pairs crosses a certain point. This
signal allows you to limit losses within a certain amount, but allow you to increase profits.
Often overlooked risk is the probability that a broker can close your position if the amount of
potential loss is equal to the balance on the reserve account. You can follow an inclined trend
and get off the gaming arena in anticipation of a more favorable market situation, but when you
replenish your reserve account, it may turn out that your position is closed. If this happens, all
backup funds are automatically lost.