If you’ve dabbled in forex trading, you may have heard the word “leverage” tossed around. But what does it actually mean?
In general, leverage refers to controlling something big using something small. In the world of forex trading, it specifically means having a small quantity of your account’s capital control a larger quantity in the market.
Leverage in forex can be a difficult concept to wrap your head around. That’s why we’ve compiled a comprehensive guide on leverage in forex, breaking it down to make it simple to understand.
Let’s jump in!
The Benefit of Using Leverage in Forex Trading
The main reason you’d want to use leverage in forex is that it’s possible to generate a large quantity of money using very little capital.
At the same time, though, you could lose a large quantity of money when using leverage in forex trading.
Your trading outcome depends on whether you use leverage wisely and how conservative you are in the area of risk management.
Leverage Gives You Control
One of the greatest things about leverage is that it makes a market that is rather boring much more exciting.
Of course, if it’s your money that’s at stake, this isn’t necessarily always a good thing. Nonetheless, that’s what you get with leverage in forex.
Without leverage, a trader would be shocked to see his or her account move 10% in a year’s time. Meanwhile, a trader who uses a large amount of leverage could easily see his or her account move 10% in a single day.
Amounts of Leverage
Brokers give out leverage according to their regulations and rules. For instance, if a leverage amount of 50:1 is given out, this means the following: For every dollar in a person’s account, placing a trade worth a total of $50 is possible.
For instance, let’s say that you have deposited $500 into an account. In this situation, you could trade an amount as high as $25,000 using a leverage amount of 50:1.
That’s not to say that you should trade $25,000. It simply means you have the option of doing so.
What Do Professional Traders Typically Do When It Comes to Leverage?
Professional traders usually trade with low leverage.
Why? Because this protects their capital when they make mistakes in trading. It also leads to more consistent returns.
So, what exactly is low leverage? We’re talking about amounts like 20:1 or 10:1.
All in all, you have to figure out a trading style that works best for you. It takes experience to understand when you should use leverage versus when you shouldn’t.
Just remember that you don’t need to use leverage just because it’s there. As a general rule of thumb, the less you utilize, the better. The more cautious you are, the longer you’re likely to remain in the trading game long term.
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