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How does leverage work in Forex?

by Tripp Casey

In foreign markets, leverage is one of the most used trading tools and is typically 100: 1. In other words, this implies that for every $ 1 you have in your account, you are going to be able to trade a value equivalent to $ 100. Take a look at a Trade Horizon Review to see what they offer in terms of leverage and other trading conditions.

Indeed, brokers know that if the trader knows how to manage his account, he will also manage risks. Otherwise, they would never offer such a level of leverage. Also, since the Forex market is particularly rich in liquidity, it will always be easy to enter and exit the trades at any time. Of course, this is not the case with all markets, and this is a good point for currencies.

In general, in trading, one should use pips to follow the movements of currencies. The pip is the smallest movement in the price of currencies, and it mostly depends on the currency pair you are trading. Concretely, a pip is only a fraction of a penny. We can take the example of the famous GBP / USD pair, where the movement of 10 pips (from 1.9000 to 1.9010) will only net you a tenth of a cent.

Now you understand why monetary transactions have to be done in large quantities. It helps turn those small profits into higher income when using high leverage. When you trade large securities, such as 100,000 USD, small fluctuations can translate into attractive profits (or large losses).

The risks of excessive leverage:

Here we are going to grasp the negative side of leverage. It’s because while the latter has the potential to make your investments profitable, it can also cause you to incur substantial losses of an equivalent magnitude. The higher the rate of leverage you will use, the greater the risk involved.

How can the leverage work against you?

You should always calculate the risks! While leverage will undoubtedly allow you to boost your income significantly, it should not be forgotten that it is also a major risk element. For example, if you make a mistake and the stock price ends up going in the opposite direction of your expectations, the leverage will also magnify the losses you will incur. To minimize risk, traders apply an especially rigorous trading model and never deviate from it. This model includes careful use of stop orders, which are essential in limiting damage in the event of a loss.

The leverage effect: a double-edged sword

One of the reasons why so many traders are more interested in Forex than in other sectors is the accessibility of this form of trading. However, this is not the only advantage of this type of trading. In addition, it is one of the few to offer such high leverage. Besides, this is why we take the example of Forex in this article.

Also, many traders do not feel comfortable using other people’s money for investing. However, as you will see, it can even be a good idea, provided, of course, you know how to do it properly. Here, we’ll show you how using leverage in Forex trading can dramatically improve or seriously hurt your strategy.

Some information to remember:

Using leverage is like borrowing funds to increase your trading position beyond accessible levels using only your funds. Brokerage services allow you to use leverage when trading on margins. Note that the funds you are going to get come from your broker.

Traders specialising in Forex use this tool to amplify the small profits they generate on fluctuations in the currency market. Leverage has the potential to increase your losses as much as your profit.

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