What is Leverage Trading in Forex?
Put simply, leverage is a strategy whereby traders borrow money to invest in currency and stocks. The use of leverage is very common in Forex trading because investors can trade in larger positions by borrowing money.
In turn, this can help increase returns when a currency’s exchange rate makes a favourable movement. However, using leverage for Forex trading can also be a double-edged sword. This means it could also increase losses without the right strategy in place. For this reason, Forex traders must learn how to manage leverage and exercise a degree of risk management.
The Risks Associated With Leverage
Although the ability to earn a significant amount of profit by using leverage is substantial, it can also work against traders. For example, if a currency underlying a trade moves in the opposite direction to what a trader thought would happen, leverage could potentially amplify a loss. However, Forex traders normally use “stop-loss” orders to control any potential losses to avoid such a situation. A “stop-loss” is a type of trade order that means the broker can exit their position at a certain price.
Leverage Margin Example
A leverage margin depends on what a specific broker requires. But, it typically depends on the size of a trade. For example, to control a £100,000 position, a broker will set aside £1000 from your account.
Your leverage (which is expressed in ratios) would be 100:1, which means you’re controlling £100,000 with £1,000. Margin is usually expressed as a percentage of the full position. Most Forex brokers require 2%, 1%, .5% or .25% margin.
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