Leverage:
Leverage is a multiplier of your money in forex trading. It is commonly said in terms of percent. Generally Brokers offer different leverages. I will explain you more clearly. Let’s say your broker is offering 1:100 leverage. That means with $1000 (one thousand) amount of money in your account, you can actually manage $1000X100 (1:100 leverage) which is $100,000 in forex trading. So generally people like you and me will only have a couple of thousands or hundreds of dollars in the account but manage hundreds of thousands of dollars in forex market.
Brokers offer different leverages from 1:50 to 1: 400. But you have to be very careful when you are using high leverages like 1:400. This might be very profitable but at the same time it is very risky also. Let me explain you more clearly.
Lets say you have a standard account and you are using a leverage of 1:400 and you are trading EURUSD. You entered the forex trading with buying the currency pair for one standard lot. Lets say the trade goes in your favor and the EURUSD rose 25 pips (I will explain you what are pips in the coming chapters). Since you are using 1:400 leverage here 1 pip equals to $40 and since you got 25 pips you will get a profit of 25X40 = $1000.
But what if the trade goes against you and it decreased 25 pips. You lose $1000.
Lets say you are using 1:100 leverage. In this case 1 pip will be equals to $10 for EURUSD and if you lose, you lose only $250.
So high leverage may be profitable but at the same time it is also very risky as you may lose more money.
Lets say you have a standard account and you have $1000 in your account. You are trading on one currency pair where one pip is equal to $10. But unfortunately you went to losses of 120 pips which is equal to $1200. But since you have only $1000 in your account you will go -200 dollars in loss which you have to pay to the broker. Does this happen? The answer is “NO”. This is where the margin comes in to play.
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