What is Leverage in Forex Market?

The notion of leverage is used by investors and companies. This means borrowing money to invest on something. On Forex market the amount of money is borrowed from a broker. In case of companies, they use leverage to finance their assets. So they try to rise the capital using debt financing. On the other way, investors use leverage when they want to profit from the fluctuations in exchange rates between two different currencies. In other words a broker is giving the investor his account in exchange of some amount of money.

First you have to know how to calculate the margin-base leverage. That is calculated by dividing total value of transaction of margin required. To understand better we are going to take an example. If you want to trade 100.000$ of USD/CHF and if they required a deposit of 1% from the total value of transactions, then the margin required would be 1.000$. That means a leverage of 100:1 (100.000/1.000). The leverage can be 0,25%, 0,5%, 1% or 2% depending on the agreement between investor and the broker.

Also if you want a precise leverage, you have to calculate the real leverage just like before but total value of transaction must by divided to total trading capital. So, if you want to open a position of 100.000$ and you have just 10.000$ you need to trade with a 10 times leverage on your account (100.000/10.000). Most traders don’t use the amount that they have in one account so they base more on the value of margin-base.

The real leverage has some advantages like potential to enlarge your profit, but in the same manner it can increase your losses. The risk is going to be bigger if you apply a greater amount of leverage on the capital. This risk is just for real leverage but if the trader isn’t careful it might affect the margin-base leverage.

Despite all risks you can have a great profit using leverage. For example, if your currency moves in the opposite direction, the broker can put a limit so your lost won’t be too big.

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