FX Trading – The Liquidation Level !

FX Trading – The Liquidation Level !

FX Trading as we have talked about many times is run by leverage. This notion of leverage, and how much you can leverage is why forex traders can make so much dang money! But what is the Liquidation Level? Well, once the Liquidation Level has been hit, it is game over for trading.

The Liquidation Level is the point at which a forex trader can stay above, before your account gets automatically closed. Although this might sound a bit unfair, it actually helps both you and broker. Fx Trading’s leverage is well known. So because of this, traders will usually borrow money from the forex dealers. So yes, that might sound cool trading on credit, however the Liquidation Level is the level at which the forex dealer will stop taking orders from the trader. At that point, the trader’s real assets will be enough to cover any losses that the forex dealer might incur. Therefore, with fx trading the amount of margin that you trade on directly affects the Liquidation Level of your account.

Let’s talk about this notion in Lamen’s terms. Let’s say there is a hot shot forex trader, that wants to trade on 200:1 leverage. That means that for every $1 that you put into your forex account, you have $200 in buying power. Now, this high amount of leverage is not usually offered to new traders, but let’s talk about this as an example. Now, for the forex dealers, which would be more of a risk, someone who trades on 200:1 leverage or 10:1? Obviously the answer is 10:1 ! The reason being is that the forex dealer does not have to lend as much money. Therefore, there is less risk. With higher leverage comes with higher risk. Therefore, the Liquidation Level is then set to hedge the forex dealer’s assets.

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