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Beginners Guide to Understanding the Different Leverages in Forex Trading

People familiar with stock trading and Forex would know a thing or two about what leverage means in the trading world. But, not many of them out of even this group know much in detail. Leverage, when talked about with reference to trading, means a trader’s ability to boost the size of his investment or trade by making of credits they can get from their brokers.

What Does It Signify?


When you use leverage, while trading, you do nothing but borrow from your broker and whatever you have in your account acts as a kind of collateral, which is also called “margin” in trading terms.

The available leverage differs in great ways depending on the country of your origin and the kind of market you usually trade in. For instance, when you are trading in stocks the amount of leverage is usually low. It is usually the future markets that offer leverage of high degrees like 20:1 or 25:1 but that also largely depends upon the contract being traded.

What Margins Can You Look At?


If you understand what is Forex and have some experience in Forex trading and you are looking for leverage then the good news is the degree of leverage can go as high as 400:1. In other words, international brokers can offer you something as huge as 400:1.

These types of very high leverage availability easily lures traders from different background and countries and all these together add a lot of value to the international Forex market. And, why not! High leverage also means very low amount that you need to open an account. All this being said, most of the traders who prefer relying on leverage all the time and use it more often end up blowing the balance in their accounts.

Risks Involved in Forex Trading


There are great dangers involved with high leverage and this is the reason why many countries have brought in regulations and restrictions that set an upper limit on the degree of leverage that can be given to any trader in Forex trading. That being said, there are many brokers even today who still offer as much as 400:1 leverage though it is restricted to a maximum of 50:1 on leading currency pairs in countries like United States.

Understanding the Margin Call


Usually, when you enter any trade your broker keeps track of the trading account that you have. Whenever the market shifts against you the value of your account dips below the least minimum margin and you are likely to get what is called as margin call. In such cases, either you get a request for adding funds in your account or your broker may also choose to flatten your account for preventing further losses.

Understanding Extreme Leverage and Why You Should Shy Away from It


These are some of the reasons why extreme leverage is something smart traders don’t usually go for and is also considered as something antithetical in trading world. Mostly experienced traders believe that leverage levels should be kept as low as possible and they suggest that any trader shouldn’t risk anything more than 1 or 2% of the total account value for one single trade.

About John C.

John C. is a professional Forex trader with over 15 years of experience in the stock trading market. He often writes articles on Forex trading for different leading finance journals.