Leverage in forex trading is a tool that allows traders to control a larger position in the market with a smaller amount of capital. It works like borrowing money from your broker to open trades much bigger than your actual account balance.
For example, with a leverage of 1:100, you can control $100,000 in the market with only $1,000 of your own money.
How Does Leverage Work?
Leverage is expressed in ratios such as 1:10, 1:50, 1:100, 1:500, etc.
Here’s what each means:
- 1:10 → Every $1 you invest controls $10 in the market
- 1:50 → Every $1 controls $50
- 1:100 → Every $1 controls $100
- 1:500 → Every $1 controls $500
Higher leverage gives traders access to bigger positions, but it also increases the risk of losing capital quickly.
Why Do Traders Use Leverage?
- Trade Larger Positions
- Leverage allows small accounts to participate in significant market movements.
- Increase Potential Profit
- Bigger positions can generate bigger gains from small price changes.
- Flexible Trading
- You can diversify your trades without needing large capital.
The Risk: Leverage Can Magnify Losses:
While leverage increases profit potential, it equally magnifies losses.
Even a small market movement against your trade can result in:
- Rapid account drawdown
- Margin calls
- Complete loss of capital
This is why proper risk management is essential when trading with leverage.
How to Use Leverage Safely:
- Start with low leverage (1:10 or 1:20) if you are a beginner
- Always use stop-loss orders
- Avoid overtrading
- Risk only 1–2% of your capital per trade
- Choose a trustworthy broker with transparent margin policies