Forex Leverage Power

Do you know that forex leverage is a very powerful tool that is employed by many professional currency trader when trading foreign exchange currencies? Forex leverage simply means that the trader is borrowing money from the broker to trade and therefore, the trader could achieve returns that are many folds the amount of the initial capital. Simply said, the trader is borrowing money to make money. For example, a forex leverage of 100:1 ratio means that the broker offers 100 times the initial capital amount of a trade. Say, you put down US$5,000 in a trade and achieve 10% return on that trade, with a leverage of 100:1, you have actually achieved a return of 1000%, or a return of US$50,000 on your initial US$5,000 capital.

Take USD/EUR = 0.6743 as an example, the price movement of the currency pair is usually less than US$0.01 or 1 cent a day. As such, the prospect of making a significant amount of money by trading in this small gap price movement is very limited. This is where the power of forex leverage comes in to play. With a leverage of 100:1, the earning is now magnified 100 folds. There are even some brokers who offer forex leverage of up to 500:1, this has thus made the prospect of making huge amount of money big time a possibility.

So, how is that possible? Forex leverage is a loan that is provided by the broker to you whom you had your forex currency trading account with. The broker provides the financing for your trade, effectively allowing you to trade a whole lot more than you would otherwise could afford.

Do keep in mind also that forex leverage is a double edged sword. It can make earn you big money as well as make you lose big. Leverage is like a magnifying glass. If you could make US$50,000 on a 100:1 leverage, you could lose that same amount as well from your US$5,000 initial capital. Hence, skills, knowledge and adequate risk management are the pre-requisite if you want to trade successfully.