Leverage in Forex Market
Leverage is a tool used in forex trading to increase a trader's exposure to the market by allowing them to control larger positions with a smaller amount of capital. For example, if a trader has a leverage of 1:100, they can control a position of $100,000 with just $1,000 in their account. This means that even small movements in the market can result in significant gains or losses.
Example of Leverage:
Let's say a trader has $1,000 in their account and wants to trade the EUR/USD currency pair, which is currently trading at 1.2000. Without leverage, the trader can only buy or sell $1,000 worth of the currency pair. However, with a leverage of 1:100, the trader can control a position size of $100,000 ($1,000 x 100). So, instead of buying or selling $1,000 worth of EUR/USD, the trader can buy or sell $100,000 worth of the currency pair. If the price of EUR/USD moves up by just 1%, the trader would earn $1,000 ($100,000 x 1%). On the other hand, if the price moves down by 1%, the trader would lose $1,000. This shows how leverage can amplify both gains and losses in forex trading.
