How to Understand Forex Leverage

How to Understand Forex Leverage

Forex trading is no longer a narrative for most folks across the globe.

Unlike in the past, when it first appeared, the forex market is now easily accessible, eliminating the notion that it was mainly meant for institutions or folks with a massive amount of money.

Several currencies are involved in trading forex; however, the most influential currencies are the US dollar, the British pound, Euro, the Japanese Yen, Swiss Franc, and the Australian dollar.

Forex Leverage

The forex market can sometimes be a tricky place to be, especially when you have little understanding of the general forex market.

Several players are involved in forex, and together with forex brokers, they help provide an account as well as a trading system required for trading.

Leverage is one of the things you should understand when trading forex.

What’s Leverage?

Forex leverage is the ratio of a trader’s funds to the size of a broker’s credit. Therefore, leverage is merely a borrowed capital for a trader’s account to increase their potential of returns. It usually exceeds by several times the invested capital.

In fact, the main reason as to why most people decide to take a shot in forex trading is the provision of forex leverage. It’s used by companies and investors alike, and it’s obtained via the help of a broker.

Moreover, the size of leverage is usually not fixed, and it depends on the trading conditions provided by a given forex broker.

So, leverage in forex trading is simply a means for any trader to trade much larger volumes than they could by using their own limited amount of the trading capital.

Sounds good, right?

Looking Closely on Forex Leverage

The movements of the currencies in forex trading are measured in pips. Pips are the least amount of change that belongs to the currency price.

Transactions in forex trading are made in vast sums of money to help define the leverage.

Another instance whereby leverage comes in handy is when different currencies of two countries alternate in value.

Forex Leverage

Since the broker is the one that provides leverage, an account is therefore created with a specific broker. The broker then sets the leverage, which is, in most cases, 200:1, 100:1, or 50:1.

Therefore, what it means is that, if a trader wishes to trade like $200, 000 with a 1% margin, then the trader will be required to deposit at least $2,000 in their account opened with that broker.

However, one thing that every trader needs to understand is that each forex trader must choose a certain level of leverage that they are most comfortable with.

The Element of Risk

While leverage can immensely increase a trader’s potential profits, it can also increase the potential of losses.

Therefore, it means that you have to be extra cautious when choosing the amount of leverage on the trading account.

Careful risk management is required, and one of the things is to avoid trading with the whole balance.

A trader should, as much, avoid opening a position with all the trading volume. Furthermore, brokers provide risk management tools such as stop-loss orders to help manage the risks effectively.

Therefore, with proper management, forex leverage can be used both successfully as well as profitably.

Leverage is an extensive area that requires time to master; hence, you should take your time to go through a variety of forex courses provided online.

How to Choose the Best Leverage Level Leverage in Forex Trading

Which is the best leverage level? – The answer to the question is that it is hard to determine which is the right leverage level.

As it mainly depends on the trader’s trading strategy and the actual vision of upcoming market moves. That is, scalpers and breakout traders try to use high leverage, as they usually look for quick trades, but as to positional traders, they often trade with low leverage amount.

So, what leverage to use for forex trading? Just keep in mind that Forex traders should choose the level of leverage that makes them most comfortable. IFC Markets offers leverage from 1:1 to 1:400.

Usually, in Forex Market 1:100, leverage level is the most optimal leverage for trading. For example, if $1000 is invested, and the leverage is equal to 1:100, the total amount available for trading will equal to $100.000. More precisely saying, due to leverage, traders can trade higher volumes.

Investors having small capitals prefer trading on margin (or with leverage) since their deposit is not enough for opening sufficient trading positions. As it was mentioned above, the most popular Leverage in Forex is 1:100. So what’s the problem with high leverage? – Well, the high leverage, besides being attractive, is very risky too.

Leverage in Forex may cause considerable issues to those traders that are newcomers to online trading and just want to use significant leverages, expecting to make large profits while neglecting the fact that the experienced losses are going to be huge as well.

Author : Michael Fasogbon

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Michael Fasogbon is a professional Forex trader and cryptocurrency technical analyst with over five years of trading experience. Years back, he became passionate about blockchain technology and cryptocurrency through his sister and has since been following the market wave.