Forex Trading is one of the most rewarding trading platforms. The currency market is the most liquid market and forex trader earn money in seconds.
Most forex trader also ends up losing a large amount of capital in forex trading, and the reasons are many.
Interestingly, one of the weapons in the forex trading is responsible for both, for making forex traders billionaires and bankrupt. Some call it a double-edged sword. It is one of the things that makes the boring forex trading adventurous and exciting.
The weapon is,
Leverage or Forex Leverage.
Many investors, forex traders use the word leverage but not all of them know the meaning of it and that is why they fail miserably in the forex trading.
There are many definitions you will find on the internet.
In a simple way, it is defined as-”to use something to maximum advantage.”
Another definition is- “the ability to use something small to control something huge.”
In financial term, Leverage is to borrow capital to invest expecting it will give a higher return. It means you have a small amount of money in your forex trading account and you will be controlling a larger amount in the forex market.
In forex trading, you borrow the money from a broker with some margin money. Forex trading offers high leverage in the initial margin by which many forex traders earn money. It doesn’t matter what kind of trader you are and what kind of credit you have you can use leverage in forex trading if you have an account and broker offers margin.
The foremost advantage of leverage is you can make a substantial amount of money with a very small amount of fund. You can control the money in the market with the leverage.
Leverage can be profitable only if you know how to use it and what kind of leverage is important for you as per your capital and risk management.
With leverage, you have more control than you can imagine
If a forex trader doesn’t use the leverage he will be happy to see 10% growth in his capital in a year however a treader who use big calculated leverage can see the 10% more in his capital within a week or maybe within a day.
With leverage forex trading become compelling and courageous, but sometimes adventure leads to tragedy, therefore, leverage brings losses in FX-trading as well. You should be aware of the volatility you can experience with the leverage you are using.
Leverage is given in a fixed amount that can vary with a different broker. The typical amounts in leverage are 50:1,100:1, 200:1, and 400:1.
50:1– Fifty to one leverage means for every one dollar you can place a trade worth of fifty dollars. Suppose if you have deposited $ 200, you would be able to trade $10,000 on the market with 50:1 leverage. It’s not that you will be trading the 10,000 but you have the ability to trade that amount.
100:1– This leverage is offered typically on a standard lot. The minimum deposit can vary with the broker. Suppose the minimum deposit amount is $3000 for the standard account, it will give you the ability to control $300000.
200:1– Especially offered in mini lot account. Similar to other, with $1 dollar you will get the ability to control $200. The minimum amount to deposit is around $300. Suppose you have deposited $400, you will be controlling the $80000.
400:1– Some of the brokers offer this leverage in micro lot account. But be aware of the fact that with a very small amount of in this leverage can be wiped out very easily. You will be controlling $400 for every $1 in your account.\
There is one more term used with leverage i.e. Margin
When you trade in forex with the help of a broker, the broker uses some of the amounts from your account, this is Margin. Suppose to control 100,000 amount your broker will keep $1000 aside. In ratio, it will be expressed as 100:1. This money is known as ‘good faith deposit’ with the broker.
The broker pool this money with other traders and use this super margin money in trading in interbank trading.
Margin and leverage both used to refer the same concept but with a slightly different perspective. You can say leverage is the byproduct of margin. You use margin to leverage your money.
To use certain leverage you need to deposit margin money.
There are already predefined numbers for margin and leverage.
|Margin Required||Maximum Leverage|
Believe it or not most professional trader trade with very low leverage, as low as 10:1 or 20:1. Regardless what your broker is offering you, you can trade with these type of leverage. The only condition is you have to deposit more money and make fewer trades. They use these small leverage to avoid mistakes and to minimize the risk associated with it.
Leverage is good there is no doubt in it. Because of leverage forex trading is exciting and brings you more money than any other trading platform. But you have to remember just because leverage is where you are obligated to use.
The basic and simple way to use leverage is- less is better. The less leverage you use the better it will be for you. You can use the big leverage but you have to be very sure of your position, your risk tolerance, you limit to lose money and your financial goal. Use forex leverage with a very cautious and calculated approach.