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What Is Leverage in Forex and How Does It Impact Trading?
Leverage gives traders the option to trade with more capital than they own, but comes with additional potential risks
Published January 14, 2024.
The foreign exchange market is the largest in the world. Its daily transactions amount to $5 trillion, as per the Nasdaq overview.
Note: Fortrade offers the ability to trade the price changes of foreign currencies with CFDs and NOT to buy/sell ownership of the foreign currency itself
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What Is Leverage In Forex?
Leverage is using borrowed funds to make trades on a margin, to trade with more funds than you actually possess. The position is held using leverage provided by the brokerage, and the investor only pays a percentage of the total trade amount to them, which is the initial margin.
» It's also important to understand volatility in forex trading
How Leverage Works
The brokerage has different margin requirements for each trade, and as an investor, you can adjust the amount of leverage based on your appetite for risk.
As a rule, lower margin requirements give you more leverage over each trade. That means a margin of 2% (or 50:1) would allow you to have $1,000 in your account to make a leveraged trade of $50,000. Similarly, a 1% margin requirement (100:1) lets you make trades of $100,000 with an initial margin of $1,000.
» Wondering if CFDs offer higher leverages than traditional trading?
Leverage's Impact on Trading
The forex market, in contrast to equities, tends to be more stable. This stability opens the door for brokers to offer something interesting: leverage.
However, tread cautiously. Leverage can boost your profits, but at the same time, it can also lead to greater losses. It's a bit like a double-edged sword. So, be judicious. Only employ it when you're genuinely confident that your trade will come out on the winning side.
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