Forex leverage could be described as the needed amount of money given to you by your trading platform or broker to enable you participate in forex trading with little commission. This money is given to you to boost the amount of money you trade with in the market These leverages is what makes most traders attracted to trading forex.
But forex leverage is a double edged sword because in as much as it can help you make more profit, it can also cause huge losses. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money. To get the value of margin based leverage, divide the total transaction value by the amount of margin you are required to put up.
Margin-based leverage = (Total value of transaction)/(Margin required)
It is also advisable to use 1:100 leverage in forex trading to avoid higher risk. If you are required to deposit 1% of the total transaction value as margin and you intend one mini lot of USD/CHF which is equivalent to US$10,000 the margin required would be US$100. Thus, your margin-based leverage will be 100:1 (10,000:100).
Margin-based leverage in ratio Meaning
1. 1:400 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 400 lot
2. 1:200 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 200 lot
3. 1:100 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 100 lot
You can make decent profits and losses during trading when you monitor currency movements in pips which is magnified through the use of leverage. When you trade with a big amount by using higher leverage, a small in the price of currency can result in significant profits or losses.