Leverage is a trading mechanism that allows traders to increase their position size by using money from their broker as capital. Traders use this financial instrument to generate a larger profit, without having to provide the typical upfront cost that comes with a sizeable position.
Let’s explore how leverage plays a role in the forex market.
Let’s explore how leverage plays a role in the forex market.
Forex broker leverage explained
There are several important points to consider when using leverage during forex trades:
Specific to forex trading, leverage means you can have a small amount of capital in your account, controlling a larger amount in the market.
While you have leveraged capital in an open position, you are responsible for the entire amount. This includes any losses you might incur.
Leverage allows you to profit from small changes in the forex market. These profits would otherwise only be accessible to traders with huge capital.
What other markets can you trade in using leverage?
Aside from the forex market, leverage can be used in trades involving:
Shares
Indices
Commodities
What is the margin in forex?
You cannot fully answer the question “what is leverage in forex” without understanding margins. A margin is the amount of money you need to use leverage. It is the percentage of your own money used in a leveraged trade.
Here is an example to illustrate the margin level meaning in forex.
If you use 10x leverage, your margin will be 10% of the overall size of your position. For a $500 trade, the margin is $50. However, with 20x leverage, the margin is 5%. For instance, a $1,000 position will have a margin of $50.
Here is an example to illustrate the margin level meaning in forex.
If you use 10x leverage, your margin will be 10% of the overall size of your position. For a $500 trade, the margin is $50. However, with 20x leverage, the margin is 5%. For instance, a $1,000 position will have a margin of $50.
| 10x leverage |
20x leverage |
|
| Overall position | $500 | $1,000 |
| Margin | $50 | $50 |
| Margin percentage | 10% | 5% |
Margin call in forex trading
High-level forex brokers may use margin calls when the trader can no longer meet margin requirements because of a losing trade. A margin call is when the broker asks the trader to deposit more money so that they still have the minimum margin amount.
If the trader fails to do so, the broker closes the position automatically, requiring the trader to take the loss.
For traders concerned with potential losses, there are strategies you can use to prevent massive losses. For instance, implementing a stop to your position if a price moves against you or utilising price alerts and limit orders.
If the trader fails to do so, the broker closes the position automatically, requiring the trader to take the loss.
For traders concerned with potential losses, there are strategies you can use to prevent massive losses. For instance, implementing a stop to your position if a price moves against you or utilising price alerts and limit orders.
How leverage affects your market exposure
To give you a better understanding of how leverage works, let’s use a $1,000 investment as an example:
 |
 |
 |
 |
|
| Leveraged trading (1:20) | Unleveraged trading (1:1) | |||
| Outlay | $1,000USD | $1,000USD | ||
| Exposure | $20,000USD | $1,000USD | ||
How to use leverage successfully on the forex market
There are several steps necessary to use leverage successfully.
Choose the right amount of leverage
Most seasoned traders will use between 10x and 20x leverage. This amount allows them to trade without excessive risk while targeting reasonable profits.
Test your strategies
With platforms like MetaTrader 4, you can test-drive strategies to see how they work in real market conditions with a demo account.
Focus on risk management
Risk management tools, like stop-loss orders and position sizing, can prevent losses while using leverage.TMGM Trusted high-leverage forex brokers
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Frequently Asked Questions
Good leverage in forex depends on your strategy, position size and the market. You should use enough leverage to meet your risk/reward requirements without exposing yourself to too much risk.
For instance, with 1:500 leverage, you can control $50,000 with only $100. However, if a $50,000 position loses $1,000, you will owe $900, which you will need to pay back even if you do not have $900 in your account.
For instance, with 1:500 leverage, you can control $50,000 with only $100. However, if a $50,000 position loses $1,000, you will owe $900, which you will need to pay back even if you do not have $900 in your account.
10x leverage, also written as 1:10, allows you to control $10 for every $1 in your margin account. This amount is available for most assets, including forex, indices, commodities, and share CFDs. Some traders consider this a safe amount of leverage because it does not expose you to significant potential losses in markets with normal volatility levels.
Leverage is not mandatory when trading forex. In fact, beginner traders can trade without leverage. Once your skills improve, you can gradually increase the amount of leverage you use. Most experts recommend new traders stick to 1:10 leverage or below until they are comfortable and confident in their strategies and see positive results.
Yes, some traders do this when they are new to forex to limit losses. However, currencies move incrementally, so you need huge amounts of capital to make profits without leverage.
For example, if a trade nets a profit of $0.0020 (20 pips), and you invest $10,000, your profit is $20. However, if you use 10x leverage, your profits will be $200.
For example, if a trade nets a profit of $0.0020 (20 pips), and you invest $10,000, your profit is $20. However, if you use 10x leverage, your profits will be $200.
One of the most critical concepts in forex leverage is that when the leveraged capital is in an open position, you are responsible for it. The losses must come from your account if you have a losing trade. To prevent significant losses, traders can apply risk management strategies, like stop-loss orders and position sizing.