Forex trading has become increasingly popular among investors and traders around the world. With its 24-hour trading capabilities and high liquidity, it offers traders the opportunity to make profits from small changes in currency pairs. However, to maximize profits, traders often use leverage – a tool that allows them to trade with more money than they have in their account. In this article, we will explain what leverage is on Forex.com and how it works.
What is leverage?
Leverage is a financial tool that allows traders to increase their exposure in the market by using borrowed funds. In other words, leverage allows traders to trade with more money than they have in their account. For example, if a trader has $1,000 in their account and they use 1:100 leverage, they can trade with $100,000.
Leverage can be a powerful tool for traders, as it allows them to increase their potential profits. However, it also increases the risk of losses, as losses are also magnified. Therefore, it is important for traders to use leverage wisely and understand the risks involved.
What is the leverage on Forex.com?
Forex.com offers leverage up to 1:500, which is considered high compared to other brokers. This means that traders can trade with up to 500 times their account balance. For example, if a trader has $1,000 in their account, they can trade with up to $500,000.
Forex.com offers different levels of leverage depending on the account type. The standard account offers leverage up to 1:50, while the commission account offers leverage up to 1:200. The professional account offers leverage up to 1:500.
It is important to note that leverage is a double-edged sword. While it can increase potential profits, it can also magnify losses. Therefore, Forex.com offers negative balance protection to ensure that traders cannot lose more than their account balance.
How does leverage work on Forex.com?
To use leverage on Forex.com, traders need to have a margin account. A margin account is a type of account that allows traders to trade with borrowed funds. The margin is the amount of money that traders need to deposit in their account to open a position.
For example, if a trader wants to open a position of $10,000 and the leverage is 1:100, they need to deposit $100 as margin. The remaining $9,900 is borrowed from the broker.
If the trade goes in the trader’s favor, they can make a profit. However, if the trade goes against them, they will incur a loss. If the loss exceeds the margin, the trader will receive a margin call from the broker. A margin call is a request from the broker to deposit more funds into the account to cover the losses.
Therefore, it is important for traders to manage their risk and use leverage wisely. Traders should only use leverage if they understand the risks involved and have a solid trading plan.
Conclusion
Leverage is a powerful tool that can increase potential profits in Forex trading. However, it also increases the risk of losses. Forex.com offers leverage up to 1:500, which is considered high compared to other brokers. Traders should use leverage wisely and manage their risk to avoid incurring large losses.
