Leverage in forex is a “loan” that the broker gives to the trader so that the trader has more capital to trade with than what he or she initially deposited. Leverage is expressed in the form of a ratio and it depends on the client’s knowledge and experience. Pure Market Broker’s leverage is up to 1:200. Let’s have a closer look to what exactly does a leverage ration mean? Say a trader has a capital of €30,000 and is trading with a 1:100 leverage. Since his leverage is 1:100, he has a trading capital of €3 million. If he decides to buy the EURUSD at 1.1405 and closes his position at 1.1505, he will almost double his capital. Here’s another example of the same trader but with a different outcome. This time he buys the EURUSD at 1.1405 and closes his position at 1.1355 and almost loses half his capital. It is important to always remember that leverage increases your trading capital, providing opportunities for multiplied profits. But it might as well multiply your losses. Use leverage wisely.
