What is Forex Leverage?

Forex Leverage or Leverage simply means the % amount of money you are allowed to borrow from the broker when you open a position. Typically in Stock market when you buy 100 shares of a company trading at $10 per share, you are required $1000 to open the trade. Some stock brokers would let you borrow money from them, most cases it is 50-80% of the total stock value.  So instead of $1000 you are now only required to have $500. This helps traders to buy more shares with same amount of money. However stock broker would charge you interest on the money borrowed.  Forex Leverage is similar except on steroids.

Forex Leverage

A typical Forex Broker would let you borrow 99% of the total value required to open a trade and you only need to come up with the remaining 1%. So if you are about to trade $1000 then you only need to have $10. Big difference from normal stock trading. Also Forex broker won’t charge you interest on the borrowed amount.

Leverage In Forex Market

Note that in case of stock trading you will liable to pay up $500 (or more) you borrowed in case of a loss. In Forex, your broker will close out all open trades as soon as your account available balance reaches zero.

The above table is only a guide, when trading live the Required Margin will change based on currency pair. In my personal opinion one should not go beyond 100:1 leverage in Forex trading. However your opinion may differ so feel to add comment with your preferred Forex leverage and why.

You may also want to read about “Does higher Leverage in Forex Trading help?”

Chris Farnworth is an independent Forex and Commodity trader with many years’ experience under his belt. He travels and works from around the world trading and writing content for various websites and blogs. In his spare time he enjoys scuba diving and surfing.

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