No matter which level of forex trader you are, beginner or expert, you must have heard or read phrases like “leverage is a double-edge sword” or “Leverage is a two-way street”. These are not wrong and should not be ignored by any forex investor. Forex Leverage can and will make or break your forex trading career. For those of you who do not know what leverage is or still have confusions about this term in forex then let us tell you everything you should know about forex leverage.
Forex Leverage Definition:
Forex is just a loan given to you by your forex broker so that you can trade at a bigger position than you would have been able to do with your full capital. It is a notional amount that you can borrow from your forex broker against a security money that is called margin. Notional amount means that you do not actually get the money physically but it is credited in your account with respect to your forex trades.
How does forex leverage work?
Leverage allows you to only risk some of your capital and still make bigger trades. If you open a trade with your 100% available capital, you are risking all your real investment with a leverage ratio of 1:1. With leverage like 100:1, you deposit a percentage of your real investment i.e. $1000, to trade at $100,000. This allows you to make huge profits with risking low capital, that you get to keep and return the leverage money to your broker.
Risks of using leverage:
If you are thinking of using leverage after reading above, make sure you read the risks involved before making a final decision. So when you trade with a big position on borrowed money, you are exposed to higher loss as well. How does that happen? If you are making profits, you are equally exposed to facing losses as well in the forex market, especially in volatile conditions. If your trade does not go as planned, you might end up losing all your capital including the leverage that might even put you in debt. Most brokers give you a margin call when your real investment turns zero or close your position automatically and ignore the leverage amount so that you can deposit more money and start trading again. However, some might not offer leverage on these terms and hold you liable to pay the borrowed money which can put you in huge debts. Even if your broker allows negative balance protection, you might lose all your investments if you use higher leverage that requires more margin percentage.
Now that you have all this knowledge, you will be able to trade safely. Keep in mind that forex is not a shortcut to make quick money but a possible way of earning a stable income, so you must treat it like you treat your job or business if you want to keep doing it for a long time.