Leverage is the financial term that refers to the relationship between equity and credit that is invested in an operation. Through leverage, the investor deposits an amount as collateral and your broker offers you a number of borrowed funds so you can open much larger positions than you could do with your capital alone.
Therefore, when doing online trading how to use leverage in forex you can invest in large volumes with a much lower required amount of money. It is one of the most important tools both in the Forex market and when investing with CFDs, ... since it is practically impossible to obtain significant profits without it, especially when you do not have a significant capital.
The level of leverage is expressed by two numerical quantities surpassed by two points. A fairly typical level of leverage that you can find today in many online brokers for Forex can be 1: 200, ie for every euro you bring as capital you can trade in the market with 200 euros. In this case the percentage of own capital required corresponds only to 0.5% of the operation. If we have a leverage of 1: 400 the percentage of equity required is 0.25%, whereas in a leverage of 1:20 it is 5%, but also the profitability is considerably reduced.
Is leverage your best ally to make profits when trading?
Given the above, leverage can seem like a great opportunity to make profits and a priori the more leverage you have in your reach better than better. But you have to keep in mind that it really is a double-edged sword: High leverage can allow you to obtain significant profits if everything goes forward in your favor (since you are trading in the market with a much higher amount than you deposit and for Both the profits that you are going to collect are those of the total of the operation and not those generated only with your capital), but on the other hand, this capital increase also increases the risks considerably and exposes you to greater losses if you do not hit and the Operations are advancing against you.
The level of risk you assume is greater the more leverage you use since the operation you open is also larger. When using leverage, even if the broker offers you a loan amount, any position that goes into losses you must be able to "endorse" it with your own capital that you have deposited in your trading account. Brokers usually apply security mechanisms to prevent your account from being left with a negative balance and will automatically close your open positions if the available capital is insufficient to guarantee the transactions in losses (this is known as Margin Call or margin call) . This is okay so you do not incur a debt beyond the amount of money you have deposited in your account but you will still have lost all your capital and that is what you should try to avoid.
How to use leverage wisely?
It is very important that you understand the opportunities and also the risks that the leverage offers. It is very difficult to get a reasonable profit without leverage but you must be prudent and use it head. If you are a beginner, do not be seduced by aggressive levels of leverage offered by many brokers as they can lead to greater losses. Act with caution and postpone the decision to increase or not leverage to when you have more knowledge and experience.
Leverage management should play a key role in your risk management strategy. You can more easily withstand any movement against if the operations you open are small and the capital you have available is sufficient that if you overhand and open a positions too large in which the minimum movement of the price against you can make you Capital to disappear completely. Keep a cautious approach and the attractiveness of the benefits does not make you lose sight of reality.
Most brokers establish a maximum level of leverage that will depend on the investment instrument of your choice (Forex currencies, stocks, indices, commodities, ...). In Europe today there are online brokers that offer maximum leverage levels of 1: 1000 or even 1: 2000. In the United States, the CFTC (Commodities Futures Trading Commission) regulation prevents the use of leverage greater than 1:50. Many brokers allow you to choose the level that you think is more convenient and change it according to your needs. In this comparative table: Broker forex teregulasi with Greater Leverage you can see the list of brokers we have analyzed and in the column "Details" you can see the maximum level of leverage offered by each one of them. You can visit their respective websites for more information and in most cases you can test your Free Demo Accounts and check the levels of leverage you have available in your trading platform for each financial instrument.