Have you ever thought that why forex trade leverage gets talked about so much??
Being a trader or if you have ever considered the forex market for making huge profits, then you would have surely come across the term ‘online forex trading leverage.' It is something which is advertised by most of brokerage firms as one of the leading features of their trading accounts. But have you ever tried to know that what exactly it is?
The term ‘forex trade leverage’ refers to the capability of gaining an advantage at little or no cost. Forex brokers and traders apply to this on a daily basis to garner profit.
In simple words, it can be explained as the competence to trade large volumes of a currency with a small amount of capital invested in that particular trade/deal.
Primarily the leverage value is set by only brokers, but it can be either be a 50:1, a 100:1 or even a 200:1.
For example, if a trader is willing to trade $200,000 along with 1% margin, then he/she has to deposit $2,000 in the account of your broker. The trader can also take online forex trading courses and practice on demo accounts to understand this concept properly.
Note: In forex trading, leverage is used every day in trades worth hundreds of thousands of dollars each, and still traders have to risk only a fraction of amount needed. It is worth mentioning that the entire credit should be given to the forex brokers for making it possible.
Let us learn that how does “forex trade leverage” work
In order to understand the mechanism of forex leverage let us quote an example.
If a trader places a $500 deposit and is offered with 100:1 leverage, then trader can open a trade of $50,000. This indicates that if the pair of currency chosen by the trader rises by 1%, then trader will earn $500, else 100% return on investment made by the trader. This is really huge, and it may take place within 2 or 3 days.
But leveraged trading forex also has risks as well. Let us consider the above example once again of 100:1 leverage on a deposit of $5000. Supposing that the pair of currency chosen by the trader shifts 0.5% in wrong direction. In that case; the trader will lose $250. Yes, the trader will incur a loss of 50% in a single trade and half of the money invested by him for this trade.
Did you know?
Brokers lend traders the bulk of the money used to trade because statistically 35 percent of the time the trader loses!
Note for the novice traders
If you are new in forex trading business, then it is recommended to you that you must not go over 10:1 level. If the position of trader rises by 1%, then he/she gains 10% return, but if the trader loses then only 10% of the deposit will go in vain. Also, the trader will be having a lot more to work with and get it back in future trades.