What is Leverage
One of the biggest attractions to the Forex markets is the leverage FX brokers are able to provide. Traders are leaving Stocks and Futures to trade Forex because the leverage is so attractive. So what is leverage?
Leverage is a magnifier. It takes the money you want to put up to trade and magnifies its value.
Trading currencies means you are buying and selling with the expectation that the exchange rate changes in your favour. These changes are 100ths of a cent so they don’t amount to much, but with the power of leverage you can make a small change magnify into a larger change.
Right now in the US, brokers are able to offer you leverage of 50:1
What this means is your buying power is magnified 50 times. If you want to trade $1000 worth of currency (1 micro lot), you only need to trade with $20 of your own money (margin). This $1000 of currency equates to roughly 10 cents per pip of movement.
With the power of leverage you can really make a trade worth something. Outside of the US, brokers are able to offer you up to 500:1 leverage!! This means to control the same $1000, all you need is $2!
They call it “lending” or “borrowing” from your broker, but there isn’t any money that really gets borrowed or lent.
Beware! Leverage works great when a trade goes your way, but it’s equally as powerful when the market moves against you. If you can gain 10 cents a pip, you can lose 10 cents a pip. The more you read about Forex, you will find many sites call leverage a “ Double Edged Sword” and this really is the case.
Leverage is what can make trading currencies so profitable, but please, use its power wisely!
Best regards