What is Leverage in Forex

It is quite possible to avoid negative effects of Forex leverage on trading results. First of all, it is not rational to trade the whole balance, i.e. to open a position with the maximum trading volume.

That's not all ...

Apart from that, Forex brokers usually provide such key risk management tools as stop-loss orders that can help traders to manage risks more effectively.

Here are the basic points to manage the leverage risks properly:

  • using trailing stops,
  • keeping positions small
  • and limiting the amount of capital for each position.

So, Forex leverage can be used successfully and profitably with proper management.

Keep in mind that the leverage is totally flexible and customizable to each trader's needs and choices.

Now having a better understanding of Forex leverage, find out how trading leverage works with an example.

Forex Leverage Example

How does Leverage Work Account balance is $1000 with 1:100 leverage. You have decided to open a buy position with EURUSD pair with a volume of 10.000. The position is opened at price 1.0950. Stop Loss order is set at 1.0850 price. The required margin for this position is equal to €10 000 x 1/100 x 1.095 = $109.50. If you do not want to spend much time on calculating margin for all of your positions you may use our Margin Calculator. In case the market goes in different direction, your loss will equal to $100, since 1 pip value in EURUSD currency pair is $1 (for 10.000 volume), and the difference between your opened price and Stop Loss level is 100 pips. If you do not use Stop Loss order, you may lose pretty higher than $100, depending when you will close your position. Stop Loss order can be used both for Long and Short positions and its level is decided by you; that is why it is one of the best risk management tools in online trading.

How to Calculate Leverage in Forex

To measure the leverage for trading - just use the below-mentioned leverage formula.

Leverage = 1/Margin = 100/Margin Percentage

Example: If the margin is 0.02, then the margin percentage is 2%, and the leverage = 1/0.02 = 100/2 = 50.

To calculate the amount of margin used, just use our Margin Calculator.

You can read more about What is Leverage here

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