Forex Leverage

In the world of Forex trading, there is a lot of technical language used that can be quite perplexing to the average Joe just starting out. It can be quite a daunting prospect to get your head around all of the terms and exactly what they mean. Whereas some of these terms can be left until you have found your feet, Forex leverage is something that you should learn about before you even step foot in the Forex marketplace.

Leverage is something that affects all Forex traders and is something that you will come across on a daily basis when trading. Leverage is a part of other financial markets as well as Forex but Forex leverage is something that is quite unique.

So what exactly is Forex leverage? Well, in the simplest of terms, leverage is an amount of virtual money that is given to a trader when they open an account. This allows the trader to buy and sell currencies on the currency market because their trading account value has been increased. You can therefore take advantage of the fluctuations that occur between your chosen currency pair or pairs. In essence, leverage allows the trader to trade in currency with money that they do not possess!

This can be a scary thought for a newcomer to Forex trading but it is a standard practice. You will find that only those traders with large accounts who can survive large losses will be able to afford trading without having any Forex leverage in place.

As an example, take an account where the broker has given a leverage amount of 200:1. This means that for every real $1 in the account, the broker has provided another $200 of “virtual money”. Essentially this means that a trader can deposit an initial amount of $1,000 and be able to operate the account to a value of $200,000. Having said this, it is impossible to lose this virtual money but you can make profit with it. Should you make a loss, the loss will be taken from the real funds in your Forex account or on any profitable trades that you have made.

This is why it is important that newcomers to the Forex marketplace know all about leverage before they begin. The leverage offered by brokers varies from 10:1 all the way up to 500:1. You need to thoroughly check and ascertain what the correct Forex leverage should be for your account – the last thing you want to happen is for a Margin call to be placed on your account (this means that your trades will be stopped by the broker because there is not enough real money in your account to account for the losses).

Forex leverage is considered to be a double-edged sword by many traders. Whilst it can help to increase the potential of gaining a profit, it can leave you in a tricky situation if you are encountering a fair amount of losses (and high priced ones at that). Certainly for someone who is new to Forex trading, they should be looking at a leverage of 50:1, 100:1 or even 200:1 to start off with. It is recommended that novices totally avoid the higher leverages offered by brokers. The amount you are likely to be offered by the broker will depend on the broker themselves and the size of the position that the trader is investing in initially. It is possible to help minimize risks when it comes to leverage by ensuring that you have appropriate stop orders and limit orders applied to your trades.