Leverage in Forex

Leverage allows traders to hold large positions in the Forex market with fewer capital. With leverage trading, traders can borrow money from a broker and hold larger positions, which in turn could magnify returns or losses.

What is leverage in Forex?

Leverage in Forex trading refers to borrowing money from a Forex broker to open a position in the market. With leverage, you can put only a fraction of the full value of a position with your broker lending you the rest of the amount you need. The leveraged money is then used by the trader to hold a larger position in the market. Earned profits and incurred losses are based on the entire trade’s movement, which is why leverage is often referred to as a double-edged sword in trading. Therefore, it's important for Forex traders to learn how to manage leverage and mitigate risks to minimize losses.

How does leverage trading work?

You can use leverage with any size of account balance. But it depends on the leverage ratio and margin of your Forex broker.

The leverage ratio is the amount of your fund in relation to your broker’s credit size. It shows how much a trade can be magnified with the margin by the broker. The margin required by a broker depends on the rules and trade size of the exchange house.

If the margin requirement is 1%, traders will be required to hold at least 1% of the total trade amount as a margin. The leverage ratio for this sample trade is 100:1. This means that for every $1,000 deposit, you can trade $100,000 worth of currency pairs.

To better understand leverage trading and how it differs from traditional Forex trading, lets us look at an example:

You open a position at USD/EUR for $5,000.

Traditional Forex trading requires traders to put in $5,000 in the market upfront. Any profits earned or losses incurred would be made by blocking the sum of $5,000 in the market. If the price moved up by $20, you would earn $20 on top of your $5,000.

When you use leverage, the investment amount you put in is substantially low. For instance, if the leverage is 10%, you can enter the same market position by only investing 10% of the total amount $5,000, which is $500. Even though you opened a position with only $500, you can still get the same amount of profits or losses that you would receive in a $5,000 position.

Benefits of leverage trading in Forex

 

Market Shorting

With leverage, you can speculate market movements and benefit from both rising and falling markets. So when the market is bearish, you can go short to profit from the dip. Once you sell, you can buy an asset back at a lower price to widen the gap between the high selling price and the low buying profit. This way, you don’t risk too much of your account despite a falling market.

 

Magnified results

Leverage trading multiplies your returns whenever a trade is successful, as profits are always calculated on the full position. However, one must be cautious as this can also magnify losses. If a trader opens a position and the market reverses, the incurred loss would be greater than the sum of their capital.

 

Diversify your portfolio

Using leverage enables you to free up a huge chunk of your capital to invest in other markets. And if you are not looking to diversify, leverage trading is one of the best ways to reach a greater market exposure.

Start leverage trading today

Trading Forex with leverage allows you to deposit only some percentage of the total trade value. This gives small capital traders freedom to explore larger markets with the hopes of reaping large profits. However, one must be well-informed about the challenges and risks involved before using leverage in trading.

Frequently Asked Questions

 

What is the maximum leverage in Forex trading?

Depending on your location, you may be able to get up to 1:500 leverage.*Keep in mind that leverage on Forex (both Major & Minor) will follow if traders are approved for either 1:100 / 1:200.

 

How does leverage affect Forex trading?

Since leverage allows you to trade with borrowed funds, it maximizes your profits as well as your losses. The higher the leverage, the greater you are exposed to the market.

 

Can you trade Forex without leverage?

Essentially, yes. But in most cases, it is almost impossible to trade with registered brokers without leverage. Brokers usually provide a minimum leverage of 1:33, and very few to none provide a 1:1 leverage, which means trading without leverage.