Forex is costly trading and more money required for it, but everyone can do it easily even have worth less than $50. People have also attraction towards this trading. This is because a forex broker gives traders high leverage (borrow) for trading. Therefore, it is also known as leverage trading. So we can discuss here that what is leverage in forex trading and how it works?
What is Leverage in Forex Trading?
Leverage is the ratio between the trader’s funds to the size of the broker’s funds (borrowed fund). It usually increases invested fund of the forex trader for several times. Different forex broker provides different size of leverage. In other words, a forex broker funds that allow the trader to control big trade with some small amount.
For example, if forex broker gives us leverage of 1:100, it means we control a hundred times bigger volume than normal. If we invest $1, then the broker will invest $99 to hold the active position.
How Does Leverage Work in Forex Trading?
For example, you have $1000 balance in your account with leverage of 1:100. Let discuss how does leverage work in forex trading. In the forex market, the quoted price of EURUSD is 1.1200. Now you have opened a sell position of EURUSD pair with a volume of 1.000. The value of one Pip is equal to $10. If the market goes down to 1.1150 according to your expectations, you will be earned 50 Pips, which is equal to 50*10=500 ($500), which is a big profit, investing $1000. In case the market goes on a different side, then you will bear the same loss of the same worth. So be careful in forex trading.
How to Choose the Best Leverage Level in Forex?
Choosing of leverage in forex is depending on the trader’s trading strategy. High leverage is used by scalpers for short time trading because they are booking high trade for a short time. Long time traders, they commonly used low leverage amount. So, it should be in your mind that you may choose the leverage level where the market is most easy for you.
Big leverage also creates problems for traders who have a low amount in their account, because if we book a big trade with high leverage, then our account will easily wash. Forex beginners recommend for booking a small trade.
Forex Leverage Risk Management
As you can increase your profit by using forex leverage, but the risk of FX leverage cannot be ignored. If you are using FX leverage on your account, then your account is not free of risk. If the market goes against your expectation, and you have a small amount of free margin, definitely your account will wash and you will accept the loss. Therefore, you may be careful while using leverage on your trading account.
You can also use risk management tools to decrease your loss, such as stop-loss, take-profit, trailing stop, and limit order.
Benefits of Leverage in Forex Trading
The financial market is the biggest market in the world. More than five trillion dollars trading occurs in a day. So we need a huge amount to trade in the financial market. The deposit of such huge amount cannot be bearable to everyone. So forex broker helps the clients and awarded them leverage without charging any hidden commission.
The most important benefit of leverage in forex trading is to lift our account many times of the original deposit. This can enable us to book a big trade and earn more money from a small fund.