What is leverage in Forex?

Leverage is a type of the borrowed capital that allows getting more serious profit from Forex investing. In fact, it’s a kind of mechanism that helps the broker to increase the trader’s capital by a certain number of the operations, but at the same time a trader risks a larger number of the operations.

Broker does not give the real funds to increase the number of operations, and only uses the specific instruments with the help of which the volume of the funds increases. For example, if we are talking about the leverage of 1: 100, this means that the amount invested in Forex trading will be increased by one hundred operations. The leverage may be different. But it’s quite often that for the small deposits the large leverage is offered and for the large deposits — the small one are offered.

The brokers may use such instruments to limit the losses by the funds that are kept on the trader’s account. If the rate is negative, a trade will be closed in case the indicators reach the amount that is located on the trader's account. The broker doesn’t risk anything at all, and the trader receives the priority to close the trade without debts to the broker.

Leverage using features

When a trade is open, the price moves either in the direction that is predicted by a trader or in the opposite direction. Each point of the movement corresponds to a well-defined, fixed amount of capital and the leverage, so the amount of the received profit is credited to the trader’s account (automatically) or deducted from the account if the market suddenly moves against the trader's prediction.

The trading currency pairs is conducted with the help of the so-called “contracts” for a certain number of lots (i.e. the standard lots). Each lot is equal to 100,000 units, so to trade full volume, it's required to have a large capital amount, which, unfortunately, not every new trader has.

That’s why the leverage is used, with its help you can trade a large amount of funds. When open a trade using leverage you get in fact the borrowed capital from the broker, but these funds are not credited to your account and you see that with the leverage each point costs more than with the normal deposit amount. There are more chances of getting the larger profit but the risks are increasing too.

Requirements of the minimum account balance

The many modern brokers set the rules of the minimum capital amount, which acts as a collateral — so called the margin. The parameters of this amount, which the trader has to deposit to use the broker’s leverage, are different and depend on the broker's terms and conditions of the cooperation.

The Forex brokers also set the different parameters for the leverage capital, some brokers offer the following variations: 1:10, 1: 100. Therefore, the deposit increases ten or one hundred times. For instance, the trader deposited 10 US dollars and used the leverage of 1:10. The amount that the trader may use to open the trades will be equal to 100 US dollars, which may bring the incredible profit when the price moves in the right direction. But if the price moves in the opposite direction, the losses are also possible, and these losses can be the reason for the automatic closing of the operations.

Some of the brokers are able to provide the leverage from 1: 500. But the experienced and professional traders say that there is no such need for these risks, and for the normal trading process the leverage of 1: 100 is quite enough.

What are the dangers from using the leverage capital?

Many traders, especially the beginners who just start their Forex career, apply the leverage and do not take into account all the risks that are formed by using it in trading. If the trader ignores such risk of the leverage using, the applying of leverage capital may provoke the complete deposit loss.

The advantages of using leverage capital

The main advantage of the leverage capital is a possibility of minimal trading investment. You don't have to pay the full price per an operation in market, it's enough to have a small deposit amount to open the larger operations. Hence, the leverage allows each person to begin trading already today.

With such leverage it's possible to invest in the more prestige trading assets. It can lead to the potentially larger profit amounts.

By using the margin in trading you can enter the market with a small deposit, but the risks are essential. Trading with the leverage educates the trader by the systematic reminding of the risks. This exactly will help the trader to quickly understand the stop-loss role in the reducing the potential losses in case of working on financial markets with a larger deposit in the future;

Client independently chooses the leverage size depending on the level of their knowledge, as well as on the initial capital amount;

To get leverage you don't have to fill in additional loan application forms. After account depositing just choose the appropriate (that suits you) leverage size in a field of trading platform, and you can start trading.