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Defining Leverage Meaning and How it Works in the Forex Market

Leverage meaning is one of the first things beginners should clarify before entering the financial market. To define leverage in Forex, you need to understand what capital is. It is not just funding you use for trading. It is the amount of borrowed money provided by a chosen broker. When it comes to leverage, it actually defines the amount of credit a trader borrows from a broker to buy assets along with expected returns.

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As a rule, the leverage volume is usually several times bigger if compared to the invested capital. What’s more, the value is not fixed. It can be different from one broker to another depending on the trading conditions delivered by a particular platform. As a result, leverage is a chance for a trader to use bigger capital without actually owning it. If it was not for leverage, all traders would be quite limited in their actions simply without having enough funds. In other words, brokers make it easier for them to join the market.

However, that is not all you need to know in order to define leverage.

Steps to Choose the Best Leverage

Which leverage level is the best one and why? How to define a proper capital volume and avoid mistakes right at once? Unfortunately. Traders will never find the exact answer to that questions, the choice should rely on a trading style and strategy, a type of a traded asset, and other crucial factors you need to take into account.

If you are looking for shorter and quicker traders, you may consider yourself a scalper or a breakthrough trader who requires higher leverage if compared to longer-term investors. Position traders usually opt for lower leverage.

What is the Right Leverage Level?

The golden Forex rule says, “choose a leverage level that will make you feel comfortable on the market”. Generally, brokers offer a typical leverage amount of 1:100. It is considered the most optimal for both beginners and pros.

Leverage example: let’s say, you invest $1,000 with the leverage amount of 1:100. The capital you may use for trading will be $100,000. As you can see, leverage makes it possible for traders to enter the market targeting higher volumes even if they do not have enough funds right from the start. It generally works for those who prefer margin trading.

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Despite all benefits, leverage may appear to be quite risky, especially when it comes to amateur traders unable to keep their emotions under control. You should not just wait for a big profit to come someday. It is vital to use technical indicators, news, and analytics, as well as other instruments that will let you predict the financial situation, sort tend or price reversals, and have a clear understanding of how markets move.

Tips to Manage Leverage Risks

The same way, it increases potential chances to win big, leverage may result in bigger losses than some can expect. This is why it is important to choose the credit amount carefully. Besides, trading discipline is very important. 

You are supposed to work out a winning strategy before entering the market. This is where a Demo account may come in handy. You can trade under real Forex conditions with the same leverage without the risk of losing real money. Once you are ready, you may open a Live account.

Additional risk management tools involve:

  • Placing trailing stop-loss orders.
  • Sticking to smaller positions.
  • Trading with a limited amount of capital for each position.

To make your trading with a chosen leverage level as successful as possible, you need to utilize proper management ideas. The task becomes a bit easier when realizing the fact, the leverage is a flexible value and can be customized following every trader’s needs.

Calculating Leverage

The leverage level can be easily measured. You will only need to use a simple formula mentioned below:

  • Leverage 1/1000 = 1/Margin equal to 1000/Margin percentage.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.