Have you ever heard the term leverage in forex trading? Do you know how leverage works in a forex transaction? If not, then you need to know what leverage is and how leverage increase your profit potential in trading.
What is the leverage?
In general, leverage is a facility provided by brokers so that you can maximize profit potential in trading by multiplying the capital you have. According to Blue Leaf, leverage is the strategy of using borrowed money to increase return on an investment.
For example, if on a transaction you use the leverage of 100: 1, then with an initial capital of USD 1000, you can control a trading transaction with a nominal up to 100 times greater, or worth USD 100,000. Thus, you can get the benefits from the difference between the sale and purchase prices that you make. The potential is up to 100 times greater.
How can leverage increase your profit?
To understand how leverage works, suppose you want to trade on the EUR / USD currency pair. To be able to fulfill a trading contract of at least 1 lot, you need an initial fund of USD 100,000.
If you use the entire capital of USD 100,000 to take a Buy position at the level of 1.1400 and close the position at the level of 1.1500, there is a price difference of 0.0100 (100 pips). Therefore, the profit obtained is 0.0100 * USD 100,000 = USD 1000 or only 1% of the total capital of USD 100,000.
Meanwhile, if you use 1: 100 leverage, you only need a capital of USD 1000 to be able to control trading 1 lot of EUR / USD for USD 100,000. Assuming taking a position in the same market, then the profit you get is USD 1000, or equal to 100% of the capital you use.
Thus, the use of targeted leverage can double the amount of profit you get. However, keep in mind that the greater potential profit gained, the greater the risk. Thus, to get the maximum trading profit, make sure you have done a complete analysis and preparation.
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