#8: What is leverage in Forex
What is leverage in Forex
Leverage in Forex means you’re borrowing money from your broker to trade a larger position.
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…
What is a margin
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.
Leverage in forex is a double-edged sword, here’s why…
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.
To learn more about risk management, check out Forex Risk Management and Position Sizing (The Complete Guide).