Forex Leverage

Forex leverage

The answer to the question why this Forex market has become this popular could be because of Forex leverage. You might have heard the word leverage in different situations in different contexts. But what actually means this especially in Forex? As you move down the article, you will get a basic yet a solid idea on what this leverage is and how that works 

Imagine that you are already a Forex trader. But you do not have enough capital to invest or open up a particular position. Then you are left yourself with two choices. What are they? You will either stay without opening a position or will borrow some money from someone else to invest in for the same. Well, that borrowing and investing in the Forex Market is called Forex leverage. But what it differentiates from common leverage methods like borrowing money from a friend or so is that you can always go for leverage with a broker. 

One of the most advantageous things in Forex is that you can get high leverage compared to other online investing methods like stock trading. Therefore there is a high possibility that you can make profits involved with the same level of risks which might in the event of a wrong decision bring losses. 

It is not as difficult as it seems to understand. For example, just imagine you are thinking of buying a house at the price of $200,000. You walk to the bank  and ask for a loan. Then the bank say, they will grant you a loan. But you will have a minimum margin to contribute which is $20,000. The balance of $180,000 would be approved as the loan. This is exactly what applies with Forex leverage too. If you have only $1000 and you would want to go to a transaction of $10,000. You may go for a broker who offers this leverage facility with the minimum (eligible) margin requirement and fill the balance of $9000 the same way.

Usually the most brokers mentions the Forex leverage margin in a percentage such as 0.25%, 0.5%, 1% and 2%. Say you spot an ad on the internet, a broker saying that you are required to go with a 1% margin. That means the percentage of your contribution for the total transaction value is 1%. Say you intend to open a position with a $100,000 account, then you are required to deposit the minimum contribution (margin) of $1000. (100,000/1000). Once taken that into a ratio you will find the leverage margin ratio as 100:1 (meaning you get $100,000 for a $1000 deposit)

Following are the most common leverage margin ratios that most brokers offer.

Minimum Margin Requirement Maximum Leverage
0.25% 400:1
0.5% 200:1
1% 100:1
2% 50:1
3% 33:1
5% 20:1

It is true that most social trading platforms offer this leverage facility at different so called ratios. Therefore it is understandable that you face the question as to which margin level to use. But I must say that It's not easy to decide the best margin level to use. Because it wholly depends on the strategy you use in Forex. But to give you a tip, it is always wise to go with the least margin levels if you wish to go for long positions and consider of higher margin levels if you wish to do scalp trading.

Note: Your capital could be at a high risk if you go for leverage without having a clear idea of Forex Leverage. Therefore it is always recommended to try with a Demo Trading account in a virtual environment before you try to do actual trading.