The complete guide to forex account leverage
Posted: Aug 06, 2022
Leveraging is a powerful tool for investors and traders that is used to maximize returns.
Before we focus on what forex account leverage is, let’s share with you what financial markets experts think about the term leverage. According to them, your leveraged trading increases returns rapidly if it is properly managed, otherwise, it may have a major effect on your cash flow. In short, forex trading leverage is a short-term loan offered by a broker which assists you to control high positions with lower capital. In this article, we are going to discuss major facts about leverage in forex trading.
Definition of leverage trading
Leverage trading is also called trading on margin or margin finance. It allows you to create a new trading position by using less capital to take a bigger position in the financial markets. Basically, this is a ratio of the amount in the trading account & the amount the person wants to trade. Leverage always enables the traders to maximize high exposure with a small capital and depends on several factors including asset trading, broker, trading experience, etc.
How does it work?
Trading with no leverage:
For example, if you have $1,000 in your trading account & you are planning to purchase some shares of XYZ Corporation.
- Latest share price: $1.00
If you purchase 1,000 shares, your investment will be $1,000. If the price increases up to 5%, you may sell out of the position at a price of $1.05/share:
- Now, return: 1,000 x $1.05 = $1,050
- Profit = $50 or 5%
Trading with leverage:
Using approximately 20x leverage, if you buy shares of XYZ Corporation, you can buy 20 times more or 20,000 shares.
- Share price (Current): $1.00
- Actual margin cost: $1,000
- Exposure: $20,000
Just like above, If the share price increases up to 5%, you may sell out of the position at a price of $1.05/share
- Now, return: 20,000 x $1.05 = $21,000
- Profit: $1,000 or 100% of investment
Is there any relationship between Forex leverage & Forex margin?
According to professionals, the relationship between forex leverage & forex margin is inverse. This means,
- High margin needed = Low leverage provided
- Low margin needed = High leverage provided
What are the major benefits of forex leverage trading?
- Leverage can free up the capital since as a trader you just commit a small fractional value of your trading assets. Your profit can also be multiplied many times.
- It reduces risks significantly. With a smaller amount of deposit, you may add different types of trading tools for the investment portfolio.
- It allows you to maximize the rate of profitability & diversify the risk with the help of different trading strategies.
- The leverage amount never affects the level of risk. This is a tool, & it always depends on the skills and knowledge of the traders.
According to the research, many investors and traders don’t have proper knowledge of Forex account leverage & what risks and benefits it carries. While leverage and margin trading both are essential tools for enabling high flexibility & market exposure, it’s crucial to know the risks and clear all your doubts, before you commit your leveraged money to the forex markets.
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