Forex is very closely related to leverage trading. The leverage that is used in retail forex is one of main things why so many traders find this market so exciting.
As we always remind you: First of all learn on demo account how all terms work in practice, and even then start trading forex with real money!
Even the smallest move of price up or down in just a few pips can result in a huge profit or loss thanks to leverage.
This kind of trading has found its place mostly in CFD trading. Brokers instantly borrow money to retail traders, who can use it to inflate their purchasing power and invest it in buying stocks, stock indices, commodities, crypto currencies and even speculate with currencies.
Leverage is actually a certain kind of a loan from a broker to a client that allows you to open a trading position much larger than your own capital. This requires a so-called “margin account“.
You may ask yourself now:
“Why is broker borrowing so much money for me? Where is the catch? What’s in it for them? ” …
Well your broker lives either from a spread or from certain markup they charge you for each LOT that you trade in case it is true ECN broker.
Leverage example:
Before you open a trade (long or short doesnt matter) you always have the possibility to choose a leverage for that particular trade. Say you choose 100: 1 leverage, that means you can handle trades that are 100 times higher volume than your own capital. For example, with $1000 available for this trade, you can profit as if you had $100,000 available on yoru account!
Go and play with our Pip value calculator, you immediately see how much $ dollars is 1 PIP of price move worth to you if you trade with $100,000!
If there was no leverage existing, imagine how far would trading with just $1000 take you! Not far indeed right ? It would be almost the same as going to the bank with $1000 and buying physical foreign currency say JPY (Japanesse YEN) in the bank without leverage.
Well without leverage you wouldn’t turn much profit.
Leverage trading is a double edged sword!
Always remember that too much leverage is toxic. Did you know that many top forex traders use leverage of 1:30 or even 1:10 ? Of course this strategy requires you to keep your account well funded with say $2k+ but this kind of trading is more relaxing and will also minimize possible future losses. With high margin say 1:500 your account margin will be dep When the market will suddenly go against your position, you will be more than thankful that you have chosen lower leverage trust me. The leverage should therefore used very cautiously!