Forex Financial Leverage: What it is and How it works

Knowing the true potential of Forex trading is impossible without first understanding the potential of leverage. When you think of Forex, you think of this gigantic market where every day millions of people and gigantic financial institutions go to do business. It is a place where now more and more retail traders try to carve out a space for themselves and make big profits even from small capital, small amounts of money that would never make you imagine that you can achieve certain goals.

However, it is possible!

Today, even the financially weakest can weigh in and aspire to achieve great goals thanks to online trading on the Forex market. It’s time for David and Goliath to finally be able to play from the beginning on equal terms thanks to an instrument that is the true soul of the Forex industry, thanks to that tool that has changed the way of operating currencies with online trading. It is clear that we are talking about leverage, with which you can really dominate the markets within which you would otherwise feel out of place.

We ask that you find out with us. In this document, we want to talk to you about everything related to leverage. We want to make your dream by illustrating its incredible qualities and potential. We also took you to know what is the most balanced and conscious way of using an instrument that can be both the cross and the delight of all financial traders, from the most experienced to the least experienced, in this promising investment world represented by the Forex market.

The Secrets of Forex Leverage

If you’ve heard a bit about trading before, you may have asked yourself one thing in particular: but how is it possible that small fluctuations in the prices of currency pairs can lead to high profits? Indeed, fluctuations are sometimes really minimal, so insignificant that they do not create certain imbalances in the world economy or the change in geopolitical assets. Yet, traders, thanks to these fluctuations, even minimal, are able to fatten their trading accounts disproportionately, it seems magical, but it is not at all!

In Forex, you make investments, and you do it sincerely. We look at the graph and do a detailed analysis to statistically understand what the next movements of investors, other market players, those who try to understand price movements might be, to predict them, are doomed to failure because the future cannot be predicted. Those who correctly predict the market trend are bound to make a profit.

In order to take sufficient benefit of these slight changes in the price of the shares of the currency pairs, you must have large amounts of currency in your hand, but since nobody is rich, you need help to increase income. The best Forex brokers provide high leverage for traders to support them and increase the profits from their real money trades. Let’s better understand how this subtle mechanism works.

Leverage in Forex: How does it work?

The concept of leverage is a basic concept in the field of trading, and yet it is obscure to most traders. In fact, it is not easy to understand, and there are some pretty complicated steps to know. But nothing is serious, because what counts above all is the income that can be accessed thanks to the use of leverage.

Since the Forex market allows the use of leverage, it is accused of being too risky for investors, and perhaps most of the slander in the field of online trading arises from this. Still, we believe that like any trader that really comes To win, even you with a conscious use of leverage can achieve excellent results. The leverage is actually a critical tool only for those who know how to use it or for those who use it unwisely; For all other traders, leverage is your best friend and a fabulous ally for making profits in the financial markets like true professionals.

As you may already recognize, the Forex market is traded on the basis of lots, in particular, 3 lots are known, each of which is 10 times greater than the previous one, so each trader can choose their level of risk and their participation shares in the market. There are the following 3 types of lots:

  • Standard lot with a face value of up to $100,000
  • Mini lot with a face value of up to $10,000
  • Microlot that reaches a nominal value of 1,000 USD

Leverage: In practice

Here things could become technical, but we will try to be as simple as possible. Basically, when a trader decides to trade a $10,000 mini lot, which is actually 10 micro lot trading and the same is true with standard lots, everything is perfectly proportioned.

Typically until a few years ago, the vast majority of people couldn’t participate in Forex because it was necessary to have substantial capital. Without the leverage even to trade a standard lot, it is essential to have a capital of $100,000.

Today, brokers can guarantee access to financial markets for private traders because they can allow you to have leverage. The leverage offered by brokers generally starts at 1: 100 or 1: 200, but it can also be much higher. There are brokers that also offer much lower leverage, down to a minimum of 1:50.

But what does all this mean?

Let’s take a practical example that gives you a good understanding of these numbers, what effect they have on capital and investments, and of course, how income can change.

With leverage, traders have the ability to access virtually amounts much higher than the capital of their trading account. For example, if you decide to trade from 1:100 leverage, you may have the rare opportunity to trade even standard lots from real equity of just $1000. Or even if you have less money at your disposal, you can start trading with $100 and trade mini lots of $10,000 thanks to leverage.

The risks of Leverage in Forex

If we have talked about the merits, we should not even hide the shortcomings and problems related to the use of leverage. Unfortunately, when it comes to leverage in these terms, too many people come to think that even within 24 hours, they have already become wealthy, and the incredible profits are waiting for the rest of their lives as traders.

What we want to clarify immediately and that you should never forget is that with the increase in leverage, the risks of trading in Forex can also increase. The true professionals and teachers of this sector do nothing but preach that risks must be limited, never increased. To do this, you must exploit leverage, but never underestimate the possible negative aspects of using leverage that is too high and too difficult to manage for those who are going to trade for the first time.

The most useful thing to do is to always stay at the levels of a basic leverage, which, as we have seen, already has enormous power, so remember not to increase the leverage above the values of 1:100.

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