What is Leverage in Forex?

Leverage on Foreign Exchange involves borrowing a certain amount of the money needed to invest in something. In the case of online forex trading, that money is usually borrowed from a broker. Frex currency trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up - and control - a huge amount of money.

It plays an important role in forex trading. In fact it’s one of the main reasons why it is so popular. It basically enables you to trade positions that are far greater than the amount of money you have in your trading account.

A leverage of 200:1, for example, means that for each dollar invested a broker adds 200 dollars on top, making the trading account 200 times larger. Thus, funding your account with $1000 at 200:1 leverage would enable you to operate a $200 000 account.


  • It requires to put up a small percentage of the total trading lot. For example, if the leverage was 100:1 and you wanted to trade $100,000 worth of currency on a margin of 1%, your required deposit would only be $1,000.
  • Obviously the major benefit is that you can potentially make huge profits if you use high amounts of leverage and make consistent winning calls. However this is extremely risky and very hard to do because any short-term volatility may wipe you out completely.
The most obvious pitfall associated with Forex leverage is due to the amount of losses that can be incurred if trading conditions take a turn for the worse and your trade moves in the opposite direction to your prediction. In this case, using leverage would multiply potential losses.

Although losses are all part of trading on the Foreign Exchange market, if leverage is not understood then losses will always be significant. The main preventative measure for limiting losses is to include stop losses or limit orders on your trades. This way, even when a high leverage is used, you can roughly work out potential losses and know whether you can afford to absord the loss or to pass on the trade before placing it.

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forexwatch said...

It will be beneficial for newbies

Bhing said...

Yeah.. for sure it will be.. :)

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