Need newbie explanation of how "leverage" works

[AC26XP]

Okay... maybe it's me.
I have read Currency Trading For Dummies and Getting Started In Currency Trading, however something just doesn't seem to be clicking when it comes to understanding "leverage".

I have just opened a practice/demo trading account with MB Trading and I am in the process of practicing, so there will not be any live forex transacting for a while (if ever).

Nonetheless, when I do open a live account, MB Trading (or whomever) requires $400 minimum to open an account with a minimum transaction of 1000 units and maximum leverage of 100:1.

What does maximum leverage mean?
Is leverage the same as margin?
And why would MB Trading give me $400,000 (the 100:1 based on a $400 acct balance, right?) to possibly blow through?
How does MB Trading protect itself from having someone completely irresponsible blow through that 100:1 leverage?
Is my $400 minimum acct balance an insured deposit of some kind?

Also, if I buy/sell 1 lot, which equals 100,000 units, does that mean I have just spent 25% of my leveraged amount?

See, how I keep running myself in circles trying to understand it?
Could someone please explain how this "leverage" thing works?

Thanks,
AC

 

[lewtz]

Okay... maybe it's me.
Nonetheless, when I do open a live account, MB Trading (or whomever) requires $400 minimum to open an account with a minimum transaction of 1000 units and maximum leverage of 100:1.

1000 units = $1000 USD, 1000GBP, 1000EUR, etc.

The 100:1 leverage means that you can buy a 1000unit lot for $10. If you wanted, you could buy a 100,000unit lot for $1,000.

What does maximum leverage mean?

Some places will offer up to 500:1 leverage, meaning you can buy a 1000 unit lot with just $2. If you wanted, you could buy a 100,000unit lot for just $2,000

Is leverage the same as margin?

Leverage = how much your money can buy in lots.
Margin = The minimum amount of money you must have in your account to participate in the market.

And why would MB Trading give me $400,000 (the 100:1 based on a $400 acct balance, right?) to possibly blow through?
How does MB Trading protect itself from having someone completely irresponsible blow through that 100:1 leverage?
Is my $400 minimum acct balance an insured deposit of some kind?

Typically 100,000unit lots will move in increments of $10(depends on the pair) per pip. If you have $500 in your account, with a margin call of $400 dollars, you can only lose 10 pips before they close your account for a margin call. If you were trading 10,000 units, you would have 100 pips you could afford to lose before they close your account for a margin call. For you, it's in your best interested to trade in 1,000 or 10,000 lots. This allows for a larger margin of error.

Also, with 100:1 leverage, your $400 can theoretically buy a 40,000 unit lot. Not 400,000.

The broker will not lose their money, you will lose your own money before being shut down.

Also, if I buy/sell 1 lot, which equals 100,000 units, does that mean I have just spent 25% of my leveraged amount?

The only money you will spend is the money you lose. You are putting up your money to potentially lose by buying that lot, however you aren't going to lose anything until the market begins to move against you.

See, how I keep running myself in circles trying to understand it?
Could someone please explain how this "leverage" thing works?

I hoped this helped.

 

[AC26XP]

Hey Thanks !

Now, I need to find a good practice/demo platform and move on to the next chapter...

 

[lewtz]

Hey Thanks !

Now, I need to find a good practice/demo platform and move on to the next chapter...

A lot of people trading forex use Meta Trader 4. You can find an unlimited demo from Alpari here: Open a Free Demo Account with Alpari | MetaTrader 4 | Micro Forex | Tight Spreads | High Leverage

Good luck!

ALWAYS DEMO UNTIL YOU ARE CONSISTENT BEFORE YOU GO LIVE!!!!!!!