One of the most attractive things about forex trading is the ability to use leverage.
Forex leverage is the ability to control a large amount of money in the forex markets, with a much smaller deposit. For instance, if a forex brokerage offers 50:1 leverage, that means for every $1 that is in your account, you can trade $50 on the forex market.
What does does forex leverage mean for you?
It means that you can make larger trades that you would be able to make otherwise. That can translate to serious profit for your bottom line. For example, let's say that you have $1000 in a trading account. If you were to put a $1000 trade on the market, the approximate pip value would be 10 cents. If you trade moved in a favorable direction for 10 pips, your profit would be $1.00, or 0.1 percent. If you were to use 10:1 leverage and make that same trade, you still would only have to have $1000 in your account, but your trade value would be $10,000. On a $10,000 trade, the approximate pip value would be $1 per pip, so a 10 pip move would result in a profit of $10 or a 1 percent gain.
On the other hand often overlooked factor of using leverage in forex trading as that it can hurt you as much as it can help you. Trading forex with leverage can exponentially increase your losses the same way it would increase your profits. You could just as easily be facing that same 1 percent loss in 10 pips.
The main benefit of leverage is really that it gives you options. If the markets are volatile, you might want to use leverage sparingly. If the markets are slow moving, you might consider using more leverage. It all depends on what level of risk management you want to use. The use of leverage is really in your hands as the trader.
On a closing note, you should really use a lot of care when using leverage. The reason that forex brokers offer traders leverage is because it increases the bottom line of the broker no matter whether the trader wins or loses. The majority of forex traders fail and the overuse of leverage is one of the reasons it happens. Use leverage carefully and you may be able to beat the odds.