Understanding Leverage in Forex Trading

What is leverage? Is it important in Forex trading? These questions are prevalent among new traders who are yet to have experience in trading. Leverage in Forex has its own set of pros and cons just like when you use the MetaTrader 4 trading platform. This can affect your trading and therefore, you need to know these things as soon as you start trading.

What is Leverage?

Leverage in trading allows you to influence your surroundings without the need to increase your resources while multiplying the outcome. This means that you can deal with the greater market with the small deposit that you have. This is beneficial among retail traders as they don’t have to invest a large amount of money into their account and still be able to invest a huge amount of funds. By the time you return the money you borrowed, you will still be left with an ample amount of cash if you have put in capital from your own pockets.

What is Financial Leverage?

Financial Leverage is a term used on a debt that was made to purchase assets. It is done so as to avoid accumulating too much equity. Financial leverage is quite popular among traders because it is mostly used for these purposes;

  • To be able to expand the asset of a firm or the individual. It also helps generate fast returns on the capital. An increase in ROE is also expected.
  • It helps in increasing the earning potential.
  • For countries where tax is deductible, it receives favorable tax treatment. The net cost deducted into the trader’s account is greatly reduced.

What is Leveraged Equity?

Leverage Equity drastically increases the returns acquired by shareholders by the time the cost of capital goes down. If you have a share in a particular company but acquired a certain amount of debt then you have leveraged equity.

What is Trading Leverage?

With trading leverage, you are allowed to take control of a much larger amount when you trade, just by merely paying a minimal deposit. Another term for leveraged trading is margin trading. You can open a small trading account with a brokerage company, find a suitable trading platform such as MetaTrader 4, then borrow money from the broker so you can open a large position. By doing so, you are magnifying your gains. If trading leverage magnifies gains, it also magnifies losses. Be very wary of it.

Always remember that margin trading doesn’t change the profit potential but reduces the equity that you utilize. The trading leverage is also known as a double-edged sword because the accounts containing higher leverage are mostly affected by price swings which in turn increase the chances of getting your stop-loss triggered. As much as possible, you must put in full force your risk management.

What is Leverage in Forex?

To boost the account of Forex traders, you must have financial leverage. Through leverage, forex traders can open an order which is 1,000 times larger than the invested capital. This means that leverage in Forex help in gaining access to greater volumes than the ones they initially have.