What Is Meant By Leverage In Forex Trading
What is Leverage In Forex Trading?:
Leverage means an advantage offered to you by the broker/brokers, with whom, you are doing your forex trading. It means that, the broker/brokers with whom you are in a deal of forex trading, will offer you several times more opportunities for investment than whatever amount of dollar you have with him/them. So, it is the opportunity for more investment than your own balance, which is called the Leverage.
Ratio of Leverage:
Each and every forex broker usually offers you this opportunity of leverage. But this is offered in accordance with a fixed ratio.
For example:-
1:1 ratio
1:2 ratios
1:25 ratios
1:50 ratios
1:100 ratios
1:200 ratios and
1:400 ratios or more than that.
In variation of the brokerages, leverage varying from 1:1 to 1:400 or even more than that, is offered. Here 1:2 leverage means that, you will be given opportunities to trade with a double amount of the amount of dollar, you have with you; that is, suppose, if you have got an amount of $50 with you, then, you are entitled to trade with $100, and again, if you have got an amount of $100 with you, then, you can trade with an amount of $200.
Take for example again, if you take up a 1:100 leverage, it means, if you have got $1 with you, you can trade worth a $100.
Warning Against Using Leverage In Forex Trading:
In order to do forex trading, you can at your sweet will, accept the leverage. But remember that, the more the leverage, the more the risks you are faced with, for, the company will not be a part of your incurring losses, and it is you who will be alone responsible to bear all sorts of loss. In that case, your trade will be closed even before crossing your principal balance.
An example will make you understand this fact clearly. Suppose, there is an amount of $50 in your account. Now, taking a leverage of 1:50, you have started a trade, investing an amount of $10,000. Now, if the trade goes against you, which in other words means that, instead of making profit, you are incurring loss, crossing your principal balance of $50, in that case, your trade will close automatically, and your balance will be nil. But remember that, along with your balance, the broker’s commission (spread) also will be added.
Now, in order to do trading on ward, you will be required to add and invest
fund again. However, if you want to avoid this unwanted for loss, you may if you wish use, the ‘stop loss system’. So, you must have to adopt extra precautionary measures, at the time of taking leverage. It is wise/better to take up leverage in keeping with your balance, and the lesser leverage you take, the better/wiser it is for you, as this involves lesser risks. However, the loss shown here, it is merely a probability, and not a reality. But if you can make a handsome profitable trade, in that case, you can make profit even if you take up more leverage. But it is better on the part of the seasoned investors to take up leverage on a small scale.
In a nutshell/in a word, leverage is given, just aiming at encouraging the small investors of the forex trading.
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