What is Leverage in Forex? • A Guide for 2023 • Benzinga

If you’ve spent any time researching forex, you’ve no doubt come across the term “leverage.” You may have seen traders talking about how to get more leverage — or you might have seen them warning each other about the dangers of leverage.

But what exactly is leverage in forex and how can you use it safely? We’ll cover some of the things you need to know to use leverage in forex. We’ll show you how to get leverage for currency trading, how to use it safely and how to maximize your profits. 

In forex trading, leverage is the ability to enter a position that’s more valuable than the amount of money you have in your brokerage account. In simpler terms, it’s the ability to borrow credit from your forex broker to make larger trades.

Most brokers calculate leverage using a ratio of dollars in your account versus dollars you can trade with. For example, the most commonly-used leverage ratio in forex is 1:100. If you have 100:1 leverage, it means that for every dollar you deposit in your account, you can buy currency with the power of $100. Using leverage is one of the best ways to invest in the forex market because currency price movements are often small. Let’s take a look at a basic example.  

Let’s say you have $1,000 in your forex account. You believe that the Canadian dollar will soon rise in value, so you invest your entire account balance into Canadian dollars. When you buy, $1 is equal to CA$1.327, which means that you add about CA$1,327 into your account.

At the end of the day, the value of the U.S. dollar falls in comparison to the Canadian dollars — $1 is now worth only CA$1.320. You exchange your money back and receive about $1,005. This means that your total profit is about $5 — and that’s before you pay broker fees.

Leverage is necessary because a currency may only increase or decrease in value by a small percentage each day. If you go through the same example listed above but with 1:100 leverage, you’d see a total profit of $500 instead of $5. 

In general, margin trading in forex is the same thing as using leverage. Brokers express margin rate percentages in a different way. When a broker uses the margin standard, it usually expresses the value of your leverage as (dollars you can trade with):(dollars in your brokerage account). For example, if your broker offers you 2:1 leverage, it means that for every $1 in your account, you can trade with the power of $2. 

You’re increasing your buying power, but you’re also creating a cottage business out of your forex trades. Essentially, you’re borrowing money to make money. Some of your profits go back to pay off the loan, and you repeat the process as much as possible. However, as with any business, there will be ups and downs—wins and losses.

If you’ve traded stocks before, you’re probably familiar with how margin accounts work. However, there are a few key differences you should be aware of. 

Many forex traders are attracted to the currency margin because they don’t need thousands of dollars to begin generating large profits. However, it’s crucial to remember that leverage can also be incredibly dangerous — especially for new traders. When you use 100:1 leverage, you can experience 100 times the losses. This means that while there is the potential for major profits with a small investment, it’s also very easy to completely wipe out your initial investment.

This makes it especially important to use the correct level of leverage for your trades. You might be able to get leverage up to 1,500:1 but it’s not a healthy way to trade and may quickly put you into debt. The most common leverage rate used in forex is 100:1, but we recommend beginning with 50:1. This is a lower risk level and requires a full 2% price movement to empty your initial investment — something that’s very uncommon with currency movements. Remember that you can always increase your leverage later on when you’re a more experienced trader.

Remember, the leverage you use for different investments will change based on the nature of the market and the asset itself. For example, you might take out a massive margin loan for something that feels to be a sure thing. However, other investments may require some margin leverage, but not nearly as much.

There are a few steps that you can take to safeguard your initial investment when you use leverage. Let’s take a look at a few tips you can use for smarter leverage trading.  

A stop-loss order is a type of sell order that helps you limit the total loss you’ll incur on your trade. When you place a stop-loss order, you tell your broker that if your held currency falls to a certain price, you want to sell immediately.

Always place a stop-loss order when trading currencies, especially if you won’t be actively monitoring price on an hourly basis. We recommend risking no more than 2% of your total capital on a single trade. 

When you’re just getting started trading forex, you’ll want to stick to trading major currencies. The USD, CAD, EUR and JPY are some of the most commonly traded currencies, and they’re also some of the most stable. These currencies are tied to strong, long-standing economies, which means that they’re unlikely to lose a large percentage of value in a short amount of time. Avoid the currencies of developing countries or countries experiencing political or economic turmoil until you become very confident in your trading. 

When it comes to forex trading (or any other type of trading), knowledge is power. Before you fund your forex account or think about making your first trade, be sure you understand what you’re getting into. Research the most popular currency pairs for your native currency, learn the difference between technical and fundamental analysis and test out your broker’s trading system by placing a few sample orders.

You should keep an eye on your investments and get out of bad investments before they spiral out of control. This is easy to say from behind a keyboard, but it’s important to remember that many investments go bad quickly and don’t stop causing problems until you exit them and cut your losses.

Yes, on the one hand, you haven’t taken a loss until you sell, but investors must know when an investment will recover and when it simply not come back to the level it should have achieved (the level that prompted you to make the trade in the first place.)

Finally, remember that currency trading can be risky. Never invest more money than you’re prepared to lose. You may have heard stories from behemoths of the industry—think George Soros—but investing is part skill, part timing and part luck. Don’t over-dream your investments, use leverage wisely and make the most of your portfolio.

Leverage in forex is a fundamental concept that plays a crucial role in determining the profitability of trading. It refers to the amount of borrowed money provided by a broker to a trader for opening a larger position than the actual amount in their trading account. The leverage ratio represents the multiplier effect of the investment and can range from as low as 1:1 to as high as 1000:1.

While leverage trading can amplify potential profits, it also exposes traders to significant risks. It is therefore essential to use leverage wisely and not be carried away by the lure of making quick profits. Traders should always be cautious and initiate positions within their risk parameters. It is also important to have sufficient capital in their trading account to manage volatility and potential losses.

In conclusion, leverage is a double-edged sword in forex trading. While traders can leverage their trades to magnify their profits, they should not forget the underlying risks that come with it. It is up to the individual trader to apply leverage responsibly and make informed trading decisions based on market analysis, risk management, and personal preferences. With the right strategy and mindset, leverage can be a powerful tool in the hands of a skilled trader.

If you’re ready to increase your forex leverage, check out these high leverage forex brokers as your next trading platform.