What is leverage in Forex trading? All online Forex brokers offer leverage trading, which starts from 1: 2 up to 1: 3000, while leverage is commonly used at rates between 1: 100 and 1: 50.
Leverage trading is also called margin trading, because you set aside a small margin from the account balance to support your deal while the brokerage company provides the rest. Margin trading is more risky than trading that does not use leverage, but on the other hand it provides opportunities to achieve a higher return, which is the goal that many Forex traders seek.
If you trade Forex without using leverage, you will need to deposit a large sum to open any trading position – for example, you will need to deposit more than $ 100,000 to open one standard contract.
When trading with leverage, you will be able to use a small portion of your money to open the same trading position – you will borrow the rest of the Forex broker. For example,
If you use a leverage of 1: 100, you will be able to open a trading position of $ 100,000 and earn $ 10 for each point you earn in exchange for a deposit of only $ 1,000. Of course, you will also lose $ 10 for each point if the price of the pair moves in your favor. Remember that the offered margin falls within the margin requirement and therefore remains at the broker’s disposal for the entire period of keeping the position open. This means that the margin available in the account is decreasing by the same amount as the margin reserved for maintaining the trade – for example, $ 1,000 is reserved as a margin in exchange for opening a $ 100,000 transaction with 1: 100 leverage. Also, do not forget that your position will open for a slight temporary loss which reflects the difference between the bid / ask prices offered by the broker. This means that if you only have $ 1,000 in your account, your deal will be closed immediately by the margin call, so always remember to keep enough free margin to cover your losses, as the brokerage company will not pay from its pocket, but will close your deals as soon as the free margin falls in your account. Below a specified level.
If you are using 1: 500 leverage and the balance on your account is $ 1,500, you will be able to open a trading position of 5 standard contracts and will remain in your account $ 500 to accommodate any potential losses. Each loss point will cost you $ 50, so your position will be closed automatically when the loss reaches 10 points. Ultimately, your $ 1,000 account remains.
If we assume that you are using a leverage of 1: 500 and your account balance is $ 10,000, and you open a trading position of 1 standard contract, in this case $ 2,000 of the balance will be withheld as margin against the open position. You will have $ 8,000 in free margin that can absorb a loss of up to 800 points.
If your account balance is $ 100,000 and you are using a 1: 2 leverage, you will be able to open 1 standard contract with a hold of $ 50,000 in margin so that $ 50,000 remains in free margin and can withstand a loss of 5,000 points before the platform issues the margin call.