Experience sharing: a simple understanding of leverage in foreign exchange trading

What Is Leverage?

Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

Understanding Leverage

Leverage is the use of debt (borrowed capital) in order to undertake an investment or project. The result is to multiply the potential returns from a project. At the same time, leverage will also multiply the potential downside risk in case the investment does not pan out. When one refers to a company, property, or investment as "highly leveraged," it means that item has more debt than equity.

As the leverage increases the trading operations start to carry different risk levels. The difference between the size of an operation and the funds from a risk-management perspective must be taken into account.

Use that leverage and have the ability to invest 100 times of your initial deposit.

Some Tips:

  1. Market participants do not pay any commission to use leverage.
  2. The maximum leverage depending on the regulatory authorities of brokerage firms may vary on different financial tools.
  3. Leverage does not affect on profit or loss of your trading operations.
  4. As the leverage decreases the margin rises.
  5. Leverage allows market participants to operate on the main funds.
  6. Leverage that is widely used at FOREX provides an opportunity to get high profit as for large investors so for those who operate with small amount of money. Other financial markets do not offer such effective investment opportunities.
  7. The market participant obtains a chance to carry large operations with a low margin.
  8. In case of loss of client’s funds as a result of trading the total loss is subtracted from margin. When the profit from trading is received the funds are transferred to the client’s account.
  9. Margin is closely related to leverage and lot size.
  10. High leverage reduces margin and increases the risk level.