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Understanding Leverage in Forex

In playing Forex we often hear the term Leverage or in a foreign language called EFFECT / LEVERAGE or often called effect in FOREX TRADING games. Every Platform always gives LAVERAGE in this spreading business world. Leverage is usually 1:500, 1:200, 1:400, etc., for more details below, I will quote the meaning of Leverega quoted from the source below:

Definition or Definition of Leverage. Leverage is the use of foreign capital per unit of capital invested. Another definition of leverage is like we borrow money at a brokerage company in a certain amount and by providing a certain amount of collateral called Margin. In other words, leverage is a form of credit, which allows us to negotiate in the market with money from brokers (through companies involved in forex). $1,000 with 100:1 leverage allows us to negotiate $100,000 using only $1,000. Options Leverage : 1 : 1 equal to the security deposit 100% of the value of the contract. 1: 50 equals the guarantee of 2% of the contract value. 1: 100 equals the guarantee 1% of the value of the contract. 1: 200 equals the guarantee 0.50% of the contract value. 1:400 equals the guarantee 0.25% of the contract value. 1:500 equals the guarantee 0.20% of the contract value.

Understanding Leverage in Forex

Financial leverage, in the sense of buying on margin, is the only way for small investors to participate in a market that was originally intended only for banks and financial institutions. Leverage is a necessary feature in the Forex market not only because of the large amount of capital required to participate, but also because major currencies fluctuate on average less than 1% per day. Without leverage, Forex does not attract capital. It is intended for a larger market share to investors in accordance with their investment skills. Leveraged credit loans in margin accounts are guaranteed by deposits. This mechanism prevents the account from falling into a negative balance.

Ranges are used for leverage not payments or asset purchases. This is a good deposit to insure against losses in trading. In fact, the concept of leverage is what makes it possible to have multiple brokers with an operating desk (Broker): These are accounts at different banks that serve as liquidity providers, while the first lenders allow for margin trading. This means that the bank allows the broker to operate with a larger amount to deposit and this in turn transfers in favor of the user.

Again, a deposit is a guarantee given to a bank that defines the maximum risk. If the account exceeds the losses with the given deposit requirement Margin (Margin Call) it is not possible to open a new position or even close the position served. As a result, the operator cannot lose more than you placed in your account.

In trading, we monitor currency movements in pips, i.e. the smallest change in currency prices, and which can be in the second or fourth decimal place of the price, depending on the currency pair. However, these moves are really just fractions of a penny. For example, when a currency pair like GBP/USD moves 100 pips from 1.9500-1.9600, then this means the difference is only $0.01 of the exchange rate.

This is why currency transactions must be carried out in large volumes, thus allowing minute price movements to be turned into decent profits when magnified through the use of leverage. When you deal in large amounts like $100,000, small changes in currency prices can result in significant gains or losses.

When trading forex, you will be given the freedom and flexibility to choose the real amount of leverage based on your trading style, personality and money management preferences.

While the ability to make significant profits using leverage is great, it can also work against investors. For example, if the underlying currency of one of your trades moves in the opposite direction of what you believe will happen, leverage will greatly amplify the potential loss. To avoid such a disaster, forex traders usually adopt a strict trading style that includes the use of stop and limit orders.