Understanding Leverage | Advanced Forex Trading Strategies

Understanding Leverage

Typically, brokers are usually willing to offer traders leverage of between 1:1 to 1:200, although many of them are willing to offer a leverage of up to 1:500.

Some will even offer their traders a leverage of up to 1:1,000 and more.

In essence, using leverage means that you are borrowing money from the market, which helps you make meaningful returns on your initial deposit.

For instance, when you use a leverage of 1:100 while you have $1,000 in your account, you can trade as though you have $100,000.

But there is more to using forex leverage.

Knowing that leverage has implications on both risk and reward is the first important step towards understanding leverage.

The appeal of forex leverage is self-evident: it helps you to make more from your trades.

Without leverage, people would be required to put substantial amounts of money into their accounts in order to get meaningful returns.

Basically, the higher the amount of leverage you use, the more the money you will need to open a trade.

However, you have to handle your leverage properly, otherwise, it could turn against you.

Many people will discourage the use of higher leverage based on the argument that it will increase the amount of risk to your account.

This is not entirely true. Sure, a higher leverage offers the potential for a trader to open oversize trades, which can wreck their accounts, but risk is a product of a trader’s money management skills.

So, even with a leverage of, say, 1:1000, you are not in any more risk than someone trading on a 1:100 leverage, if you open similar lot sizes for similar deposit amounts.

If you employ proper money management skills, higher leverage should not translate into higher risk.

When used properly, leverage is a powerful tool for traders since it gives you greater breathing room when trading, thus allowing you to make higher returns than you would otherwise make without any leverage.

You have to understand that even though the amount you require to open trades decreases with increase in leverage, the cost of trading a particular lot size does not decrease.

 


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