How to Use Leverage in Forex Trading? A Complete Guide
Leverage is the amount of loan taken from a broker to invest in a currency pair, stock, or security. In forex trading, the concept of leverage is prevalent. It is the art of controlling a large sum of money with a minimal amount of your own money. The remaining money is borrowed from a broker. Leveraged trading is also known as margin trading.
In 2022, you are not leveraged 1:1 when you are trading forex. The leverage limit can be from 3:1 up to the 500:1 ratio while trading in forex.
But, there are certain factors to know first about leverage in forex trading. How does it work in trade? And what will be the correct ratio of leverage while trading in forex?
Forex trading was an industry-only reserved for the elite class, who could make significant investments with their significant capital. In past years, $50,000 was considered to be the initial investment.
Use of Leverage in FX Trade with Example
It is essential that how to use leverage in forex trading? Let us take an example of 100:1 leverage. The leverage ratio of 100:1 means you can trade 100 times more than your initial investment in national value. This extra money is transferred to your account. Now the currency trade can be enhanced by the maximum rate. Your forex broker can control a $50,000 position by using only $500 from your account. The leverage ratio of 100:1 requires only a 1% margin in your account. Also learn about south african brokers with nas100.
Example with Currency Pair
Great power always results in tremendous responsibility. Consider the GBP/USD currency pair as an example:
Opening a one-lot trade (100,000) without using any leverage would require an investment of $127,000. But, using leverage of 500:1, the initial investment will reduce dramatically.
$127,000 / 500 (leverage used) = $254.00 required capital
We can calculate leverage of this size by applying the simple formula.
The asking price is multiplied by the contract size and then divided by the leverage ratio for buying a trade.
The bid price is multiplied by the contract size and then divided by the leverage ratio for selling a trade. For example, 1 lot= 100,000 contracts
Leverage is primarily associated with forex trading. But, some online brokers also suggest using leverage in trading CFDs. It demonstrates that leverage can also be used while trading in stocks, indices, ETFs, and cryptocurrencies. The leverage ratio depends upon the market and instrument traded.
Forex Traders Must keep this in mind.
It is crucial to understand when to use the leverage and when there is no need to use it. It is vital for the success of a forex trader. Some false brokers make you fooled by offering large leverage ratios. Yes, you can also make huge profits using the leverage. But, awareness of these scams is also fundamental.
Forex trading is a beautiful platform to earn money. The ratio of profit can be increased by using leverage. But, one should also be capable of using this leverage at the right time. One must also avoid the scams of false brokers.