Forex leverage is one of the features that make the Forex market one of the most attractive for speculators around the world. Many traders have low capitals to operate, and this is the first obstacle they face. In Forex, the problem is solved thanks to the leverage. Leverage allows anyone to operate with capitals more important compared to those actually available in the account.
To understand the concept we start from the physics. With a lever, you can lift a large weight with a little effort. In finance, with the leverage you can move large amounts of money by using small amounts. The small amount of money is called forex margin. For example, you can open a position of $ 10,000, using only $ 50 of your account.
Leverage depends by the broker. Some brokers offer a leverage 30:1, others 100:1, and so on. 100:1 leverage means that you can open a position of $ 100,000 using only $ 1,000. A leverage 30:1 means that to open a $ 100,000 position, you need a margin of $ 3,333. Here a question arises: where does it come the extra money? The answer is easy: the extra capital is lent by the forex broker.
Thanks to the leverage a trader can open large positions and earn more money, but also lose more. In fact, forex leverage is a double-edged sword that must be handled with care. Let's take an example in which a trader loses $ 250 on a capital of 1,000, with a $ 50,000 operation. It comes to 25% loss on capital. If the trader had all the availability on the account (i.e. $ 50,000), the loss would have been by only 0.5%. It's true that in case of profit the gains are good, but in case of loss, your capital is greatly reduced. You have to practice a lot and bring the odds in your favor.
There are many forex brokers that offer leverage 200:1, allowing you to open a position of $ 200,000 with an initial capital of $ 1,000. In these cases, however, you must be very careful.
Leverage is a tool that can generate really interesting earnings for all those who make Forex trading. In other words, it's like a lens which amplifies positive or negative effects of changes in exchange rates. With the leverage, you can move amounts of money considerably higher than your actual investment, even exploiting the smallest pips movements.
From this brief description, you can understand that leverage can be used as a speculation instrument.
Forex leverage is an excellent tool to make good gains in the currency market. To succeed, you must always use great caution and thoroughly study the foreign exchange market.
