What Is Forex Leverage?

What is forex leverage? That's a common question. Leverage in forex is a concept you must understand if you are going to trade forex. Leverage can be an excellent tool, or a deadly weapon that can turn against you, depending on your understanding and how you use it.

Basically, the concept of leverage means you can trade contract sizes that are many times the amount of cash you put up. For example leverage of 100:1 means if you put up $1 you can actually trade $100.

Understand though, the difference (in this case $99) is actually a loan from the broker to you. Remember, it's a loan. That means at some point it has to be paid back, and if you lose money on your leveraged trades.......you have to pay it back anyway! In that case, it quickly sucks money out of your trading account.

It seems obvious that you should never trade or risk more than you can afford to lose. But many novice forex traders think that leverage in forex is up to the broker to decide. If they offer leverage of 200:1, that's what you have to do. But that's not true. The leverage you decide to use in forex trading is up to you, not the broker, and that's often news to novice forex traders.

  Click Here for a Clear, Unbiased Explanation of Forex Leverage 

You don't need to borrow up to the maximum leverage offered by the broker, and in most cases you would be wise to keep your borrowing much lower. Think of it in the same way as borrowing money to buy a house. Your bank may pre-approve you for a mortgage of $500,000, but you find a house you like at a lower price and you can buy it with a mortgage of just $350,000. Of course, the bank doesn't like that as it means lower repayments and less interest for them; but for you, the home buyer, it's good for exactly those reasons!

In the same way, you should work with leverage ratios that are comfortable for you, not the broker. Hopefully this answers the question, what is forex leverage?

One of the most valuable resources in your forex education, and one you'll see I review here and recommend all over this site, is a great e-book called "Bird Watching in Lion Country" by Kirk du Toit, also known as Dr. Forex. Among a myriad of other priceless information, this book explains in detail exactly what leverage in forex trading is, and how it can affect your forex account either positively or negatively. The book is worth the investment just for this explanation, as it can save your hide when you start real forex trading.

The author also explains in detail what he calls his 4X1 strategy for trading successfully with low leverage. The 4 stands for 1 currency, 1 direction, 1 lot and 1 percent. Even though it may not seem too exciting, once you read and understand all about leverage in forex, you'll understand why this strategy is the one that will let you make money in the forex market over the long haul. I wouldn't recommend anybody get into forex trading without first reading this book.

   Click Here for a Clear, Unbiased Explanation of Forex Leverage