What is Leverage in Forex trading?
Leverage in forex is like a “loan” that the broker gives the trader so that the trader has more capital to trade with than what he or she initially deposited. It’s represented in the form of a ratio. Some leverage levels that FXTM offers (depending on the client’s knowledge and experience) include 1:50, 1:100, 1:200 and 1:500. Here’s an example of how leverage works: let’s say a trader has a trading capital of €10,000 and is trading with 1:100 leverage. According to his leverage, his trading capital is increased a 100 times, which means he has €1,000,000 (10,000 x 100) to trade with. If he decides to buy the EURUSD at 1.3055 and close his position at 1.3155, he will have almost doubled his capital! ((1.3155 – 1.3055) x €1,000,000 = $10,000).
On the other hand, if this same trader buys the EURUSD at 1.3055 but closes his position at 1.3005, he will have lost almost half his capital. ((1.3005 – 1.3055) x €1,000,000 = -$5,000). It’s very important to remember that, while leverage can increase your capital and give you opportunities to multiply your profits, it can multiply your losses too. Therefore, you must use leverage wisely!
