leverage, forex leverage, what it is and how to apply it

Thanks to such a tool as leverage, there is a real opportunity to earn decent money on Forex or the stock exchange, even with a small capital.

leverage is an indicator of the ratio of own funds to borrowed funds that can be provided by a broker to complete transactions.

In fact, this is a free loan, which is calculated depending on the trader’s deposit indicator. The size of the loan provided can range from 1:1 to 1:2000.

Forex leverage allows you to maximize the volume of transactions, which proportionally increases the amount of profit received from currency trading.

Everything will become clearer if we consider Forex leverage using specific examples:

• The leverage size is 1:1 - the trader trades only with his own funds
• The indicator 1:10 indicates that it is possible to increase your funds 10 times
• If the Forex broker's leverage is 1:100, in this case the volume of transactions will increase 100 times

For example, your own deposit is only 1000 US dollars, with this amount you can open a trade with a volume of 0.01 lots and earn, for example, 10 dollars.

If you use a leverage of 1:100, you can operate in the amount of 1 lot, and your profit will also increase 100 times and will no longer be 10, but 1000 dollars. It is the use of this leverage that allows an ordinary trader who does not have a large amount of funds at his disposal to earn money.

At the same time, we should not forget that when using leverage, your own funds serve as collateral and the entire loss falls solely on your shoulders.

That is, if you open a deal with the parameters – own funds 1000, leverage 1:100, volume 100,000 and receive a loss of 1000, you will lose exactly your funds, and the deal will be closed forcibly.

Questions about leverage in Forex

• Is it possible to lose the broker's money? – it is impossible, since a stop-out is triggered, the exception being the occurrence of a gap in the Forex market , when a price gap occurs and a losing trade is closed with a loss greater than the amount of your deposit.

This happens quite rarely, but it still happens, and most brokers take these losses into their own account and increase the trader’s balance to zero. • Size – brokers provide the right to make a choice in a fairly wide range from 1:1 to 1:500 and many traders find it difficult to make the right choice. There is a simple pattern here - the shorter the time frame on which you trade, the greater the leverage you can use. For example - on M1 and M5 up to 1:500, on H1 it’s already less to 1:100 and so on. Read more about making a choice here - “ How to choose Forex leverage ”.

• Risk – does using a large leverage increase the risk of trading?

– yes, definitely, the risk of trading increases in proportion to the increase in the amount of leverage in Forex. Since your position becomes less resistant to exchange rate fluctuations, and with a strong correction, you can lose your money faster. For example, trading with a leverage of 1:10, a change in the exchange rate of 1% in an unfavorable direction will cause losses in the amount of 10% of your own capital, but if you use an indicator of 1:100, you will completely lose your deposit.

• Do I have to pay to use leverage? – no, almost all dealing centers provide this service free of charge, with the exception of some banks and brokers who charge commissions depending on the term of use of the loan.

• Is it necessary to use - you choose the size of the Forex leverage when opening a new account , but this does not mean that you are obliged to open transactions with the maximum available volume.

That is, even if you choose the 1:1000 option and you have $10,000 in your account, you can open a position with a volume of 0.1 lots, although the leverage size allows you to trade up to 100 lots. (It is clear that all the figures given are rather approximate).

Therefore, do not be afraid to choose the maximum size when opening a new account, after which you will be able to independently control the volumes, and with them the risk.

In addition to the forex market, a similar instrument can be used when trading on stock and commodity exchanges, however, the amount of available leverage in these cases is an order of magnitude smaller. 

Useful articles on the topic:

How to change leverage on Forex - https://time-forex.com/sovet/izmenit-kredit-plecho

What to choose a bonus or leverage - https://time-forex.com/vopros/bonus-ili-plecho