leverage is the ability to control a large amount of money by investing only small capital in your FOREX account. The level of risk increases if the leverage offered by your Forex trading broker is higher. The amount of leverage differs depending on the type of account.
Although in most of the cases leverage is 50:1 but sometimes it can be as high as 250:1. Leverage of 50:1 means that you can control a trade worth $50 if you have $1 in your account.
For example, if any Forex trader has $100 in his/her trading account then the broker will lend him/her $5,000 for trading. This leverage makes your margin very low. In equity market, the margin is at least 50% but the leverage of 50:1 makes the margin equivalent to 2%.
Leverage is considered as the main benefit of Forex trading because it allows a trader to make good profits with small investment.
On the other hand, leverage can be negative if the trade moves against the trader because in such cases the trader’s losses are amplified by the leverage. With large leverage, there is a possibility that the trader can lose more than his/her invested money, although most of the trading firms put stop loss to protect the online trading account from going negative. Due to this reason, it is essential to consider the risk involved with the given leverage before opening an account.
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