#8: What is leverage in Forex

Lesson 8

What is leverage in Forex

Leverage in Forex means you’re borrowing money from your broker to trade a larger position.

For example:

Let’s say your account has $1,000 capital.

If the Leverage is 10:1, you can open a position size of $10,000.

If the Leverage is 100:1, you can open a position size of $100,000.

If you want to use Leverage to open a position, you’ll need to know what Margin is…

It’s the capital you must have in your account to open a position using Leverage.

Let’s say Margin required is 1% of position size.

And you want to long 1 lot of EUR/USD which costs $100,000.

So the Margin required is $1,000.

This means you must have $1,000 in your account to long 1 lot of EUR/USD.

It amplifies both your winners and losers.

Here’s an example:

Let’s say your account size is $1,000.

You want to long 1 lot of EUR/USD worth $100,000, where 1 pip is worth $10.

Assuming Leverage is 100:1.

So you’ll need a 1% Margin which means you must have $1,000 in your account.

If the trade moves in your favour by 100 pips, you gain $1,000 – a 100% return.

If the trade moves against you by 100 pips, you lose $1,000 – your account is busted.

Now if you don’t want this to happen to you, then you must have proper risk management.