Leverage in Forex Trading
– To understand what is Leverage in Forex Trading market, let’s start by taking the “leverage” word. By definition, the word “Leverage” means moving something big by using something smaller. This meaning can actually help you to understand the word’s usage in forex.
Leverage in forex is also known as “trading on margin” by forex traders. In its basics, Leverage allows you to trade more money than you have. You can think leverage as something similar to a loan without any interest charged.
With the help of leverage, you can earn a significant profit with a low amount of investment. However, you can also have significant losses with leverage.
Under normal trading circumstances, a trader’s account will show an average movement of only about 10% per year. However, with leverage in Forex Trading, the same account easily can see that 10% movement per day. So, it can make your small investment reliable for a profit or can make bigger investments even more exciting.
Amounts of Leverage in Forex Trading
Different forex brokers will offer you different amounts of leverage in Forex Trading market. These leverage amounts are represented by ratio numbers such as 50:1 or 200:1 …
You can see the most common leverage ratios listed belove;
50:1 – Fifty to one leverage
50:1 leverage means that you can trade 50 units in the market for every 1 unit you have in your account. For example, if you have $100 in your account, you can trade $5,000 on the forex market. Although it is the smallest in this list, It is an entirely reasonable offer.
100:1 – One hundred to one leverage
100:1 leverage means that you can trade 100 units in the market for every 1 unit you have in your balance. This one is quite common, if you have $100 in your balance, you can trade $10,000 on the forex market. You will see this offer quite often.
200:1 – Two hundred to one leverage
200:1 leverage allows you to trade 200 units in the market for every 1 unit you have in your account. Here we are getting incredible numbers, if you deposit just $100, you can trade $20,000 on the forex market. Some of the most recommended brokers, such as Forex.com, offers 200:1 leverage at the moment.
400:1 – Four hundred to one leverage
400:1 leverage means that you can trade 400 units in the market for every 1 unit you have in your account. This one is extreme, if you have only $100, you can trade $40,000 on the forex market.
Be careful with brokers that offer leverage this big, especially for small accounts. Probably these brokers are willing to allow you to burn all of your investment with the excitement mistakes.
Forex Leverages that Professional Traders Choose
If you ask veteran forex traders, you will see that most of them prefer leverage numbers that are quite low. It is because low leverage is better for keeping the investment safe in cases of trading mistakes.
What you need to keep in your mind is that if your broker offers an amount of leverage in forex trading, it means you are allowed to use any level of leverage lower than that. This custom leverage option is what experts choose to do. A lot of professional traders only use forex leverages in forex trading such as 10:1 or 20:1.
You should do your researches and training before doing your trades. So, you can choose the right level of leverage in forex trading for you. With more experience, you will understand better, when you should use leverage and when you should not.
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