What Is Leverage?
By: Ashley
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If you've ever wondered what leverage is, with regard to forex, keep reading...
The definition of Leverage is: the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss.
Leverage is being able to use something small to control something big. Like prying up a big stone with a long handled shovel, you get leverage to do things that you might not normally be able to do.
How does that apply to Forex? Well, Forex Brokers will offer leverage with accounts. Let’s say you have a 50:1 leveraged account. Essentially, for every $50 you trade, you only have to provide $1 as a “deposit” to your broker.
Forex trading offers more leverage than stocks or futures - up to 400 times the value of your account. Most brokers are usually in the 100:1 or 200:1 range. Of course keep in mind that increased leverage also increases your risk.
At most if not all brokers, your risk is only limited to funds on deposit. There are usually no margin calls in forex trading, so if your account falls below required levels, for your protection most brokers will close out some or all of your positions automatically. You should never lose more money than you have in your account. But by the same token, you can use a very small amount of money to make big profits, because of the leverage provided with Forex Brokers.
The amount of leverage you use will depend on your broker and your comfort level.
Typically the broker will require a minimum account size, also known as account margin or initial margin. Some brokers will even open an account with as little as a couple hundred dollars, but you will find out why this might be a bad idea. We would recommend a minimum deposit of $1000 for a micro account. The broker will also specify how much they require per position (lot) traded (i.e. the Margin).
I hope you enjoyed learning about leverage. Our next lesson is on Margin. Keep learning and mastering forex right here at PipsAngels.com.
