Leverage has an important role in forex trading and by understanding how it works, it’s gonna help you a lot in profitting. In forex it is a comparison between the amount of trader capital with the number of funds that you borrow from the broker. For example, you want to open an account with a leverage of 1: 200.
It means that by providing capital of 1 Dollar, you can move funds of 200 Dollars, 199 Dollars of which are “loan funds”. According to The Balance, most professional traders trade using leverage. It means that if they want to buy $10,000 worth of stock, they only need a small percentage of the amount that they want to trade.
Additionally, you have to understand what forex leverage is before entering the world of trading, especially for novice traders. By understanding leverage, you will surely know how to manage your capital and daily trading plan.
What is the leverage on forex trading?
In a literal sense, leverage is a feature that enables investment strategies using borrowed money. The aim is to get greater profit potential. If you have heard that a company has large leverage, it means that the company has more debt than equity.
What is the relationship between leverage and forex trading?
“Trading using leverage” means that you borrow money temporarily at a brokerage company in a certain nominal amount. They will provide collateral in smaller amounts, but the amount is proportional to the loan obtained. Well, this guarantee is called “Margin”. The greater the leverage, the more “security deposit” needed is even more economical.
In addition, forex leverage only affects the amount of power we can use and does not affect the amount of profit or loss. Besides, it only affects the amount of forex margin, which will determine how much minimum capital we need to open and hold a position.
