What is Leverage?
Leverage in forex is basically the ability to control larger trades using small amount of capital. The very basic rule of leverage you must always remember when trading forex is that leverage is not there to be used all the time. In this part, we are going to understand more about leverage and how we can use it effectively.
Leverage is usually stated in certain amounts, typically 50:1, 100:1, 500:1, and so on. The largest forex leverage is now being offered by InstaForex; the forex broker offer a maximum of 1,000:1 leverage on standard account. This means you can control $1,000,000 worth of trades with only $1,000 capital.
Higher leverage means higher stake you need to cope with. This is why you must not use leverage if you don’t have to. With a capital of $1,000 and 100:1 leverage, controlling 1 full lot means losing $10 for every pip loss. Your capital can only withstand 100 pips of movements to the opposite direction max before you are forced into margin call.
An effective use of leverage can help you gain more profits out of your trades. If you have proper calculations and accurate predictions, you can use leverage to increase the size of your trades and reap more profits along the way. If you are not certain about your positions, using too much leverage will only cost you more.
Now that you know the basics of leverage and how to use it effectively, you can incorporate this instrument to help you be even more profitable in forex trading.