Understanding leverage in forex trading: What it is and how it works,
the concept of leverage is nothing new in for companies and investors on the Forex trading. Investor or trader employs leverage to significantly improve the returns on an investment. They do this with various instruments including futures, options and margin accounts. Getting confused? If you are new to this, you better check out this following information first to learn Forex more especially about leverage.
Leverage in Forex Trading Explained
In general financial environment leverage refers to the use of debt to purchase assets. This is done with the goal to avoid employing too much equity. When it seems to be a good thing to avoid investment risks, using an excessive amount of leverage can be riskier as well. This is because there is always possibility for trader to fail on repaying the leverage.
What Is Leverage in Forex Trading?
Then, what is leverage when it comes to Forex trading? In
Forex trading, leverage is something necessary since it can help traders to maximize their capital. By the help of leverage, a trader is able to open orders as much as 1,000 times bigger than the capital they own. In another word, it is a way for trader to achieve access for much larger volumes.
The obvious benefit of using leverage is that a trader is able to create a significant amount of money with just limited amount of capital. However, leverage can be a sword with two edges. This is because you can also lose a substantial amount of money when you are trading with leverage. However, it will all depend on how wisely you employ it.
Understanding Leverage Amounts
In Forex trading, leverage is commonly given in a fixed amount which can be different from one broker to another. Each Forex broker offers leverage regarding their own regulations and rules. However, there are some typical amounts of leverage given by brokers. It includes 400:1, 200:1, 100:1, 30:1 and other amounts. For further about each of the leverage amount, let’s check this out.
• 50:1 Leverage
Fifty to one or 50:1 leverage means that every $1 you own within your account can be placed on a trade for $50. For instance, if you deposit your money $500, it means that you can place a trade which worth as large as $25,000 on the market. In this case, it doesn’t mean that you should trade the full $25,000. It shows your ability.
• 100:1 Leverage
One hundred to one or 100:1 leverage means that every of your $1 can place a trade up to $100. This kind of leverage is typically offered on standard lot account. There is usually a minimum deposit of $2,000 which makes it possible to control up to $200,000 on the market. As you learn Forex, you will know better how this leverage thing works.
• 400:1 Leverage
Similar to the other leverage amount, 400:1 leverage means that every $1 you own in your account can be placed in a trade for $400. Several brokers offer this kind of leverage on their mini lot accounts. When you find a broker that offers this leverage type for a small account, you need to be cautious since you may lose your money as a result.
Those are a few things that you need to know about leverage. For your information, a lot professional Forex traders trade with low leverage. Maintaining your leverage low will help you to protect your own capital especially when you do trading mistakes. More interestingly, it can also keep your returns consistent. Lastly, remember that most professionals use leverage amount such as 10:1 and 20:1.