In forex trading, leverage gives traders the power to manage something bigger with something small. In simple words, leverage can be referred to as a short-term loan offered by the broker to help forex bitcoin trader open large trading positions with much less capital. Many new forex beginners think that forex trading is rather boring and dull, where the market moves at a snail’s pace. This is true, especially when you compare the forex market with the stock market. However, one can actually make the forex market a market rich with abundant opportunities through the concept of “leverage”. Read More
For Example: if you are expecting the currency rate of USD/INR to appreciate, and you want to make a profit from this. Thus, to purchase a 1 USD/INR contract at Rs 73.2670, with no leverage, you would be required to pay Rs 73,267 (1 standard lot = 1,000 currency units). But, now assume your trading account only has a balance of Rs. 70,000.
So, what should you do in this situation? Would you give up your dream to make enormous money through forex trading just because you don’t have sufficient capital right now? Do you really need to be rich in order to be rich? Well, the answer to all these questions is a simple “NO”. Leverage is an absolutely amazing concept used in forex trading that can help you build unlimited wealth even if you possess less capital. Let’s learn how leverage works in the forex market and how you can utilize it to multiply your gains.
What’s Leverage In The Forex Market?
Forex leverage is the amount of short-term capital you lend from the broker that lets you control a much bigger position in the forex market with a smaller capital with only one objective in mind: to maximize your profits.
Forex leverage is always expressed in “percentage” or “X”, which is a multiple of your initial deposit. For Example, let’s assume you currently have Rs. 10,000 in the trading account, and your forex broker offers you a leverage of 10X, it means you are able to take positions up to Rs. 1,00,000. Similarly, if the leverage offered by your broker is 50X, you would be able to trade up to Rs. 5,00,000.
The most interesting aspect of forex leverage is that it can go up to 100X or more, depending on the margin requirements. The best forex broker will offer you high leverage against a small margin for forex trading.
Meaning Of Forex Margin
As mentioned above, leverage is a short-term loan from forex brokers. And, just like any other loan, you need security to get leverage. Thus, leverage is the amount that you must deposit to your forex broker to get the loan.
Relationship Between Forex Leverage And Forex Margin
Forex leverage and forex margin are inversely related to each other.
Low Margin = High Leverage and
High Margin = Low Leverage
Is Leverage A Double-Edged Sword?
Forex leverage has the potential to make the otherwise boring forex market an interesting one. However, it might appear a sweet deal, be careful! As it is said, all that glitter is not gold! Just as leverage can amplify your gains, it can also magnify the losses in case the market moves against you. What does it mean, you might ask? Well, you could lose your entire capital in one day! If you leverage as high as 100, 200 or 300 times, you are putting yourself in danger as your entire capital could possibly get eroded.
Hence, you must be extra cautious when choosing a forex leverage ratio. In addition to this, make sure you have an adequate risk management strategy in place to combat this double-edged nature of forex leverage.
What’s The Best Leverage Ratio For Forex Beginners?
There is no doubt that leverage is one of the main attractions of the forex market. Without it, traders may be required to wait for months or even more to see even a 10% change in the trading positions. However, as lucrative and fascinating as it may appear, leverage in forex trading is always considered a risky endeavor. Therefore, when selecting a leverage ratio for trading forex, bear the following points in mind:
- Start with a low leverage ratio when trading forex for the first time.
- Use a stop-loss to minimize your loss and protect your capital.
- Expose 1-2% of the capital for each trade.