Forex leverage: what it is and how to use it

Thanks to leverage, it's now possible to earn decent money on Forex or the stock market, even with a small capital base.

Leverage is an indicator of the ratio of equity to borrowed funds that a broker can provide to make transactions.

Essentially, this is a free loan, calculated based on the trader's deposit. The loan amount 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 you can receive from currency trading.

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

• The leverage ratio is 1:1 - the trader trades only with his own funds
• The 1:10 ratio indicates that there is an opportunity to increase your funds by 10 times
• If the Forex broker's leverage is 1:100, then the volume of transactions will increase 100 times

For example, if your personal deposit is only $1,000, you can open a trade of 0.01 lots with this amount and earn, say, $10. Using leverage of 1:100, you can trade 1 lot, and your profit will also increase 100-fold, reaching $1,000 instead of $10.

This leverage allows the average trader to make money even without a large amount of funds.

It's important to remember that when using leverage, your own funds serve as collateral, and any losses are borne solely by you.

That is, by opening a deal with the following parameters: equity 1000, leverage 1:100, volume 100,000 and receiving a loss of 1000, you will lose your own funds, and the deal will be closed forcibly.

Questions about Forex leverage

• Is it possible to lose the broker’s money? – It is not possible, since a stop-out is triggered. An exception is the occurrence of a gap in the Forex market , when a price gap occurs and an unprofitable transaction is closed with a loss greater than the amount of your deposit. This happens quite rarely, but still, the fact takes place, and most brokers take these losses to their 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 can be used. For example – on M1 and M5 up to 1:500, on H1 already less, up to 1:100 and so on. For more information on making a choice, read here - “ How to choose Forex leverage ”.

• Risk – does using a large leverage size increase the risk of trading? – Yes, definitely. Trading risk increases proportionally with Forex leverage. This is because your position becomes less resilient to exchange rate fluctuations, and a strong correction can cause you to lose your money faster.

For example, trading with 1:10 leverage, a 1% unfavorable exchange rate change will cause a loss of 10% of your equity. If you use 1:100 leverage, you'll completely lose your deposit.

• Do I have to pay for using leverage? – No, almost all dealing centers provide this service free of charge. The only exceptions are some banks and brokers, which charge a commission based on the loan term.

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

This means that even if you choose the 1:1000 option and have $10,000 in your account, you can open a position with a volume of 0.1 lots, although the leverage size allows trading with a volume of up to 100 lots. (Obviously, all the figures given are quite approximate.).

Therefore, don't be afraid to choose the maximum size when opening a new account; afterward, you'll be able to independently control the volumes, and with them, the risk.

In addition to the forex market, a similar instrument can be used for trading on stock and commodity exchanges, although the available leverage in these cases is significantly less. 

Useful articles on the topic:

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

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