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If you’ve been at all exposed to the world of Forex you’ve probably heard the word “Leverage” being tossed around. But what exactly is “Leverage”? Leverage is a very important part of Forex trading, and it’s critical that you know exactly how it works and how to use it. It is the term Forex traders use to refer to the ratio of invested amount related to the trade's actual value.
Forex brokers usually provide their customers with the option to trade on borrowed capital, so that traders don’t have to invest tens of thousands of dollars for the chance to make any real profit. When you trade at a leverage of 1:100, or X100, it means that for every $1 that you invest in the market, the broker invests $100. As a result, you can control an amount of $10,000 by investing $100. eToro provides traders with the opportunity of trading at up to 1:400 leverage.
It probably won’t surprise you when we say that with greater opportunity for profit comes greater risk. Just like slight fluctuations in currency rates can make you significant amounts of money, it can also cause you to lose your money very quickly. The higher the leverage, the larger the profit that you stand to make and the quicker you might lose your investment. A leverage of 1:400 can make you more money than a leverage of 1:100, but it also puts your initial investment at more risk.
If you trade with a leverage of 1:100 the market would have to move 100 pips against you for your position to be wiped out. On the other hand, if you trade with a leverage of 1:400 the market would only have to move 25 points against you for your position to be wiped out.
We recommend first opening a position with a low 1:100 Leverage, and only once you see that you’ve hit a strong trend, consider opening one with a 1:400 leverage.
The Ratio between Minimal Lot Size, Trade Size and Leverage
Fundamentally, the minimal lot size for a trade is $10,000, thus the leverage limitations are set according to the amount you choose to trade:
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The advantage of trading with Leverage is that while your profits potential is virtually infinite, at eToro your loss is limited to the amount of your initial investment. Once the rate drops below the rate covered by your investment, the trade is automatically closed. That is done through an automatic Stop Loss – explained in the next chapter.
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Forex brokers usually provide their customers with the option to trade on borrowed capital, so that traders don’t have to invest tens of thousands of dollars for the chance to make any real profit. When you trade at a leverage of 1:100, or X100, it means that for every $1 that you invest in the market, the broker invests $100. As a result, you can control an amount of $10,000 by investing $100. eToro provides traders with the opportunity of trading at up to 1:400 leverage.
It probably won’t surprise you when we say that with greater opportunity for profit comes greater risk. Just like slight fluctuations in currency rates can make you significant amounts of money, it can also cause you to lose your money very quickly. The higher the leverage, the larger the profit that you stand to make and the quicker you might lose your investment. A leverage of 1:400 can make you more money than a leverage of 1:100, but it also puts your initial investment at more risk.
If you trade with a leverage of 1:100 the market would have to move 100 pips against you for your position to be wiped out. On the other hand, if you trade with a leverage of 1:400 the market would only have to move 25 points against you for your position to be wiped out.
We recommend first opening a position with a low 1:100 Leverage, and only once you see that you’ve hit a strong trend, consider opening one with a 1:400 leverage.
The Ratio between Minimal Lot Size, Trade Size and Leverage
Fundamentally, the minimal lot size for a trade is $10,000, thus the leverage limitations are set according to the amount you choose to trade:
[You must be registered and logged in to see this image.]
The advantage of trading with Leverage is that while your profits potential is virtually infinite, at eToro your loss is limited to the amount of your initial investment. Once the rate drops below the rate covered by your investment, the trade is automatically closed. That is done through an automatic Stop Loss – explained in the next chapter.
Remember, Leverage can be a trader’s best friend when used carefully, and his worst enemy when used recklessly. It is a great tool for increasing profits, in fact private traders rarely trade without it, but you should always keep in mind that the higher the leverage is – the higher the risk level involved.
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