Leverage

Forex has stormed to the top of the available markets in terms of popularity with traders. Forex has earned this popularity by offering traders what they want: the ability to soar. This feeling that anything is possible on the Forex market comes from the heavy use of leverage in Forex. Much more than on the stock market or even with options trading, Forex traders use leverage to multiply their power in the market.
Each currency pair on Forex generally shifts only a tiny amount on a daily basis, on the scale of 1% or so. To turn this small movement into significant profits, Forex traders use leverage.
This is part of trading Forex and it’s critical that traders learn to manage leverage in order to be successful traders.

What is leverage?
When a trader opens a position that is valued at more than the amount of money he has in his deposit account, he is using leverage: money that the broker is loaning to the trader in order to let the trader take larger positions than he otherwise could.
Leverage acts as a multiplier of the trader’s own money. A leverage of 1:100 multiplies whatever funds the trader has on deposit by 100 for the purpose of opening a position. This multiplier gives the trader the ability to open a positio
100 times larger than he otherwise could open. A deposit of $1,000 with a 1:100 can be used to open a position valued at $100,000.

Brokers’ policies on leverage are individual. One broker might offer a maximum leverage of 1:50, while another might offer leverage of 1:500.
Traders must remember that they’re not required to utilize the full amount of the leverage a broker is offering them on every trade that they make; they can also place trades at less than their full available leverage.

Temptation and riskr
Leverage creates opportunity. Higher leverage creates more opportunity. It also creates more risk. It’s critical that traders not lose their heads and that they use only as much leverage as they need and not more than they can afford to risk.
Where does the risk come from? $1,000 with 1:100 leverage can open a position valued at $100,000. That’s fantastic. It means that a 1% change in market value, instead of producing a profit of $10, can produce a profit of $1,000. Obviously, it also means that instead of producing a loss of $10, it can produce a loss of $1,000… in minutes.
This is what gives Forex its edge. Leverage makes Forex trading highly profitable, and highly risky. The chance to make big profits can easily go straight to a trader’s head and derail him from his planned strategy. That could go in the trader’s favor and lead to huge profits. It can just as easily go against him and lead to total disaster.
We’ve learned in our time trading Forex that the market is volatile and hard to predict. Leveraging more than is wise can be disastrous. It’s smarter to take a smaller leverage, be patient, earn smaller profits over time and stay on top.