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What is Leverage in Forex Trading?

Leverage is a tool used in forex trading to amplify winnings in this low-velocity market.   Leverage is commonly used in most trading, but leverage in the Forex Markets are the highest because market moments are very small. Without using leverage traders would not be able to get the larger gains without a large account balance.

High leverage

Different brokers have different amounts of leverage available.  Typically you will find brokers with a 50:, 100:1 or 200:1 leverage.  200:1 is the highest leverage that I have seen, but with this kind of leverage you are going to expose yourself considerable to the market.

Best Forex Leverage

The best leverage to use is all dependent on how good you know the trade is going to be, combined with the amount of risk you want to expose your equity to.

By example, let’s say the best leverage offered was 50:1.  If you were going to trade of £50,000 you would need to have £1000 USD in equity in your account.  This is your margin.  If you are going to buy into GBP/USD for£50,000 at 1.43545 and the price goes up 1.44985 this will be a difference of 141 pips which is 1%.  This would mean a 50% increase in your capital because of the 50:1 leverage.  If the market were to have dropped 1%, you would see a drop of 50% and you would lose £500.

Some countries, like the United States, have capped the amount of leverage that can be used because of the amount of risk it can expose the trader too.

Forex leverage for beginners

I always suggest to beginners that they trade with very low leverage until they are familiar with the markets and can start doing their own technical analysis.  What is most helpful to beginners is a platform that they understand, a set of good signals and learn the basics of money and risk management.  Leverage of 1:1 to 3:1 is what I would consider is realistic for beginners who are trying to perfect a trading strategy before increasing the leverage and risking more of their equity.

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