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What’s Leverage in Forex Trading?
The big question: What’s Leverage in Forex Trading?
How can you use leverage to make money in forex trading?
It seems confusing.
But it’s easy.
Let’s break it down for you.
If we had a penny for every time we heard the question, ‘What’s leverage in forex trading?’
…we’d be retired by now.
Leverage is basically the ‘loan’ you receive from the broker to open a forex trade.
Indeed, leverage is one the main perks in forex trading.
In stocks, for example, you need to put up the whole balance when entering a trade. For example, if you wanted to buy $10k worth of Apple stock, you would need to put down the entire amount.
In forex, leverage lets you to put up a small portion of the overall trade size. So, if you wanted to buy $10k worth of euro, you might put down $1k – your forex broker would ‘lend’ you the rest.
So, what’s leverage in forex trading?
You know what it is now!
Sounds too good to be true, right?
It kinda is…
But what you might not know is, how can you make more profits using leverage to your advantage.
More on that later…
First, let’s look at whether you even need leverage when trading forex.
Do you need leverage to trade forex? What’s leverage in forex trading?
The short answer is no!
But there’s a lot to consider here…
You can trade forex with a zero-leverage account.
It’s entirely up to you.
But here’s the thing…
Price movements in forex are very small. You need to have a huge amount of money for it to make sense, unless you trade mini or micro lots.
It would be difficult to make any meaningful gains otherwise – especially if you’re trading standard lots.
Does it mean you can’t make money in forex trading?
Of course not!
Forex trading is about numbers.
If you use leverage to trade forex, the less a forex pair needs to move to make a killing. In that case, how much leverage should you use?
Forex brokers offer leverage to varying degrees.
You can get leverage up to 500:1. That means, for every dollar you put up, your forex broker provides $499. Of course, you can’t get unlimited leverage to make unlimited forex trades.
This is where margin and your account balance come into play.
So is the more leverage you can get, the better…right?
On the one hand, if you know how to trade forex, we recommend getting as much leverage as you possibly can. But if you’re still learning how to trade forex, it’s better to start with less leverage at the start and prove that you can manage risk to yourself.
The question is: how can you increase or lower your leverage in your forex account?
How to use leverage in forex trading
The first step to adjusting your leverage is by opening a forex account with a reputable forex broker. If you don’t know what broker to trade forex with, you can read our guide on ‘how you can tell if a forex broker is good’.
Once you’ve found a reliable broker…
The next step is to open an account.
This process is effortless and will take no more than a few minutes.
You need to provide the broker with your full name, email, and address. You will also have to upload copies of your ID and latest bank statement. Your account will then go through a verification process, after which you’ll be allowed to trade forex live.
You can choose the amount of leverage you want to use on your account dashboard.
You can change your leverage at any time.
For example, if you’re new, you may want to start trading forex using 20:1 leverage. We’re just picking an arbitrary number, mind you. What’s important is that you limit your leverage, so that you don’t take on too much risk at the start.
Remember, if you feel confident, you can always increase your leverage later.
Leverage: A blessing and a curse
Most forex traders ignore that leverage is both a blessing and a curse. If you don’t know what you’re doing, it can be the catalyst for your demise in the forex market.
We’ve been there and blown-up account using too much leverage in the past.
But we want better for you.
Success in forex trading is about using leverage wisely.
You need to have the right balance to maximise your gains and minimise your losses. Just because you can open larger or more positions, doesn’t mean you should.
In fact, the best traders often trade small and less aggressive – small profits add up!
Here’s an example to bring this point home…
Let’s say you have a $1,000 trading account.
You should really be trading micro lots. If you don’t know what those are, check out our blog post on pips and pip values later.
If you don’t know, when trading micro lots, each pip is worth 10 cents.
If you can make 10 pips – a excellent forex trade – that’s $1.
Let’s dig deeper…
Say that you’re trading 100:1 leverage, with your $1,000 account. That means you have $100,000 in capital exposure.
If you start trading mini lots and make 10 pips, that’s $10!
If you’re confused, check out our blog post on pips and pip values later.
The bottom line: if you make $10 on a $1,000 account, that’s 1%. Imagine if become consistently profitable and start trading a $10,000 account or more in the future. Mind you, that’s the real attraction of using leverage and forex trading.
Your ‘Start With Forex’ Takeaway: What’s leverage in forex trading?
Leverage in forex trading is a good thing.
BUT, only if you know what you’re doing!
When you’re talking about leverage, there’s no one-size-fits-all approach as well.
The right amount of leverage depends largely on your forex trading skills.
You can use as much leverage as you want.
But ask yourself this question: Should you be using that much leverage? If you’re not consistently profitable yet, we suggest lowering your leverage and learning how to manage risk.
Indeed, on the flip side, using more leverage lets you take more forex positions. That’s an important part of learning how to trade forex.
But think about it for a second.
Should you really be taking every trade?
Your ‘Start With Forex’ Takeaway: The best forex traders only take trade set-ups that have high probability of making money – not every trade! That means they don’t need that much leverage because forex trading is really about managing your risk and taking trades that have a high probability set-up.
If you want to learn how to trade forex like a professional, start by reading our FREE forex course. Remember, there’s a million ways to make a million bucks in the forex markets. So if you want a head start in forex trading, alongside our free course, check out our approved products page for forex trading signals and systems to help kick start your trading.
To your trading success,
Start With Forex
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