What is Forex Trading leverage? Use of Leverage
Leverage is the ability to use something small to control big. Particular to forex trading leverage, it means you can have a small amount of capital in account controlling a larger amount in the market.
In forex trading, there is no interest charged on margin used, and it does not matter what kind of trader you are or credit you have. If you have an account and broker offers margin, you can trade on it.
The advantage of using fx trading leverage is that you can make a considerable amount of money with just a limited amount of capital. The problem is that you can lose a considerable amount of money trading with the leverage. It all depends on how carefully you use it and how conservative your risk management is.
You Have More Control Than You Think
Without leverage, traders would be surprised to see 10% move in the account in one year. However, using too much leverage can easily see 10% move in the account in one day. While the typical amount of leverage it is important for you to know that much volatility you experience when trading is due more to the leverage on trade than the move in the underlying asset.
Forex leverage is given in a fixed amount that can vary with the different brokers. Each broker gives out leverage based on their rules and regulations. Leverage amounts are typically 50:1, 100:1, 200:1 and 400:1.
Use of Leverage
1. 50:1 Leverage
Fifty to one leverage intends that for every $1 you have in the account you can place a trade worth $50.
Example, if you deposited $500, you would be able to trade amounts up to $25,000 on the market using the 50:1 leverage. It’s not that you should be trading the full amount $25,000, but you would have the ability to trade up to this amount.
2. 100:1 Leverage
One hundred to one leverage means for every $1 you have in your account, and you can place a trade worth $100. That is a typical amount of leverage offered on a standard lot account. The typical $2000 minimum deposit for a standard account would give you the ability to control $200,000.
3. 200:1 Leverage
Two hundred to one leverage means for every $1 you have in your account, and you can place a trade worth $200. That is a typical amount of leverage offered on a mini lot account. The typical minimum deposit on such an account is around $300. Using $300 you would be able to open up trades up to the amount of $60,000.
4. 400:1 Leverage
Four hundred to one leverage means for every $1 you have in the account, and you can place a trade worth $400. Some brokers offer 400:1 on mini lot accounts. Be careful of any broker that offers this type of leverage for the small amount and trying to trade with the 400:1 leverage could be wiped out in a matter of minutes.
Professional Traders and Leverage
Professional traders trade with very low leverage. Keeping leverage lower protects capital when you make trading mistakes and keeps yours returns more consistent. Many professional trader use leverage amounts like 10:1 or 20:1. It is possible to trade with a type of leverage regardless of what the broker offers you. You just have to deposit money and make fewer trades.
Always remember, just because the leverage is there does not mean you have to use it. In general, less leverage you use the better. It takes the experience to know really when to use leverage and when not to.
Staying calm will keep you in the game for the long run.