What Is Leverage?
Leverage has developed a bad name over the decades, much of the financial crisis in 2008 was said to stem from ” over leveraged trading”. This negative connotation shouldn’t be associated with the forex market. In trading forex, leverage is an important and necessary tool to all traders. Most forex traders can’t buy 1 standard lot of Euros ($143,060) so brokers apply a certain amount of leverage to their forex trading accounts. A standard amount of leverage in the Forex market is 100:1. That means that for every dollar in your account, you get $100 of purchasing power. If you have $5 in your forex account, you can use that to purchase up to $500 worth of currency. If you have $1,500 in your forex account, you have enough to purchase up to $150,000 worth of currency, and look, now you have enough to purchase your 1 standard lot! If you wanted to purchase 1 micro lot of the EUR/USD, it would cost 1,000 X 1.4306 = $1,430, with 100:1 leverage, it will only cost $14.30. Leverage is what allow the individuals to trade forex. Don’t get too carried away though, leverage can still be dangerous and you should absolutely discuss the impacts of leverage with your forex broker and always know how much leverage is being applied to your account.