Leverage is Forex’s most basic feature and it provides the opportunity to open large positions with limited capital.
When you open an account in a brokerage firm, they let you know the leverage rate or until you reach the trading platform, there are sections where you can choose the leverage amount you want, among the variables you need to define. This way, you know the leverage you will use in your account.
The leverage is shown with inscriptions such as “1:50”, “1:100”, “1:200”.This shows you how many units you trade with 1 unit of capital. For instance, if the leverage chosen in your account is 1:100, this means with 1 dollar capital, you can invest a value of 100 Dollars. In this case, you can take a position worth 100,000 dollars with 1000 dollars collateral. If 1:200 is defined as the leverage in your account, you can take a position of 100,000 Dollars with 500 Dollars.
One shouldn’t think that “The higher the leverage, the better it is.” because the higher the leverage is, the higher the risk for loss as well as the possibility of profit. Before reaching your market target, it might move in a very volatile way in the opposite direction or if you use very high leverage, you might not have enough capital even for small adverse market movements.
It is not recommended to use leverage above 1: 100 in your Forex account. This is because the Forex market is very dynamic and people often experience instant opposite movements while going towards the target. It won’t be a smart move to bear a large amount of damage. This is why it is strongly recommended when you create an account or when you choose a trading platform in your account, don’t choose a very high leverage when you are asked to choose.