Leverage In Forex Trading

In the world of forex trading, there is a major factor that needs to be understood and that may not be found in other investment instruments, namely leverage. Leverage is a comparison of the trader's margin with the amount of loaned funds from the broker to increase returns. That is, traders can use margins that are smaller than the nominal forex contracts they trade. This concept is similar to a highly leveraged company, in which the company has more debt than equity.

In the Forex market, many brokers offer leverage as high as 1:100. This means that for every $1,000 in a trader's account, a trader can trade up to $100,000 worth.

As a trader, monitor currency movements in pips, which are the smallest unit of currency price and depend on the currency pair. Its value is only a fraction of a cent. When a currency pair like the GBP/USD moves 200 pips from 1.9400 to 1.9600, that means the move is 2 cents of the exchange rate.

This is why Forex transactions have to be executed in fairly large volumes, which allows these price movements to translate into higher profits when magnified through the use of leverage. When a trader is dealing with an amount like $100,000, small changes in the price of the currency can result in a significant profit or loss.

Leverage settings are very flexible and can be adjusted according to needs. Traders can use leverage to increase profits, but traders can also lose because of it. Remember that the greater the amount of leverage, the higher the risk a trader will take. On the other hand, small leverage will protect capital when traders make mistakes.

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