In our everyday lives, leverage is something that helps you lift something big with the help of a lever. Well, when it comes to Forex, it’s pretty much the same. But what is this lever when it comes to Forex?
On Forex, we operate with money - so, basically, your leverage would only be “more money”. In other words, leverage is a certain amount of money borrowed to a trader by a broker to increase the return. The broker gives your investment a bit of leverage and makes it bigger than it is.
Let’s take an example.
You have $1,000 and use the leverage of 100:1. It means that your investment multiplies by 100 and is now $100,000!
Imagine your investment value rises to $101,000.
Since you have got the leverage of 100:1, you get 100% of your $1,000 as profit, and it’s fantastic.
Is it always this perfect?
Let’s take the opposite scenario and see what happens if you lose $1,000.
If you use leverage, you lose 100% of your investment just like that.
Leverage works both ways - in your favour and against you.
Trading using leverage is what actually makes the market exciting and brings you bigger amounts. Without leverage, you might wait more than a year till your profit is 10%, but for those who take advantage of leverages, it’s no surprise to get 10% within just a day.
On the other hand, many traders tend to choose extremely big leverage ratios, thus risking their entire investment. Even the slightest movement in the opposite direction might end up in you losing all the amount.
Keeping your leverage at the medium level is the key to your risk management. Always think one step ahead and find that balance between fast profit and playing it safe.