forex trading

What is Forex Leverage & How It Works (Complete Guide)

Forex trading is a path that many people are busy with, some of them have made very big profits and some have suffered huge losses.

The Forex trading field is a very wide field that contains many concepts that those who want to enter this field must know, so we will resort to one of these concepts and know all its details:-

Forex leverage is one of the important terms that interest all Forex traders.

On this subject, we will learn the following:

  1. What is the meaning of Forex leverage?
  2. Levels of Forex leverages.
  3. What are the best forex brokers for leverages?
  4. What are the advantages of trading with leverage in Forex?
  5. What are the disadvantages of trading with leverage in Forex?
  6. How to choose the appropriate leverage level for you?

What is the meaning of Forex leverage?

Leveraging Forex can be considered a loan, which is an investment with an additional amount of money to achieve a higher rate of return when trading forex and this means that you can get a small amount of capital in your account that controls a greater amount in the market.

In other words, we can define and clarify the meaning of leverage in Forex as a ratio of a trader’s funds to the size of the broker’s balance.

Leverage is the borrowed capital to increase potential profits. The amount of leverage usually exceeds the capital invested several times.

The level of Forex leverage is not fixed in all companies, but it differs from one company to another, the amount of the leverage depends on the conditions that the Forex broker provides to its clients.

Levels of Forex leverages

The leverage of Forex trading allows you to control amounts much greater than the capital you invest and use in trading deals.

Leverage trading is also known as margin trading.

You can open a small account in cooperation with different brokerage trading companies and choose the most appropriate for you, then borrow money from the broker to open large deals, after which traders are allowed to inflate the amount of profits earned.

Brokerage firms provide different levels of leverages, such as:

  • 1/1
  • 1/10
  • 1/100
  • 1/200
  • 1/500
  • 1/1000
  • 1/3000

Leverage is expressed at these rates, so the leverage rate used with the size of the initial amount offered by the investor determines the trading volume in which he will trade and also determines the amount of transactions that the investor can enter into.

We will explain with an illustrative example:-

Leverage (1/100): If the investor has an amount equal to $ 1,000 and wants to invest in it and at the same time wants to enter into great deals to achieve a good profit in the deals, he/she uses leverage (1/100) for example. After using this leverage, he/she can enter into great deals as If he had invested 100,000 USD.

The most famous leverage:

  1. COM: This firm was created in 2009 and it is considered the best broker for investors, the leverage value is 1/888.
  2. Librtex: This firm gives investors a leverage of (1/500), It was created in 1997.
  3. FxPro: This firm was established in 2006, and it offers a leverage of (1/500).

What are the advantages of trading with leverage in Forex?

  1. Leverage does support the beginners, with a small amount that can be invested in deals with a large amount.
  2. Limited leverage risk: This makes the trader enters the market and is assured that there will be no losses, except for his own account balance (a small amount).
  3. You don’t have to pay any interest when use the leverage.
  4. After trading in bulk, leverage after winning deals gives you very big profits.

What are the disadvantages of trading with leverage in Forex?

  • Working with Forex brokers boosts your chances of having higher revenue but on the other hand, it also paves way for serious losses. Big earnings can end up to be smaller and small losses end up to be greater. Trading with higher Forex leverage needs you to be extremely attentive and careful never to leave out to stop when deals head away from your estimations.
  • Leverage is a constant responsibility of the person, and he/she is obliged to pay the value of the leverage to continue trading, whether he reaps profits or losses during trading.
  • Trader’s Psychology: Because the trader sees leverage as a magic wand to achieve quick riches, he uses them excessively and expands the size of the deal, which could lead to him at a quick loss.

Basically, the higher your leverage, the greater the risk that the investor can be exposed to.

Forex users sometimes use leverage to take advantage of the simple changes that occur in currency pairs.

How to choose the appropriate leverage level for you?

The appropriate level of leverage for the investor varies due to the difference in their trading experience, number of deals they have been trough.

  • If you do not want to risk a lot of money, or if you are still learning how to trade currencies on Forex, the lowest leverage level is right for you like 1/5 or 1/10. This will help you to learn how to create trades in a profitable way, and prevent large losses because they are at risk early in their path.
  • Professional traders prefer to use higher leverage (1/500, 1/1000, or 1/3000) to guarantee a large profit during their trading because they have great experience in making large deals. They usually have a plan to prevent large losses due to their long experience in this field and because of the problems they encountered.

Bottom Line

The importance of leverage for a Forex trader is that it is the backbone and essential element of an investor’s trading account which is very difficult to dispense with.

Leverage will provide you with the possibility to open deals with volumes that exceed the value of the capital and thus more successes for your trading account.

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