What Does Leverage Mean in Forex
Leverage in Forex means having the ability to control a large amount of money using very little of your own money and borrowing the rest.
Leverage means controlling large amount of money which you get from your broker. The broker offers you several leverages to select and to trade on the Forex. The leverage broker can offer you depends on the regulations in the country broker is offering his services.
Traders mostly use the largest leverage to get most out from it. When you use the highest leverage it means that you will control large sum of money.
To get the highest leverage you will use little of your money. By doing that you do not risk too much of your own money.
To put this into real scenario I will use $1,000 account as an example.
Leverage Meaning Example
When you deposit $1,000 on your trading account, you select 1:100 leverage. 1:100 is the leverage ratio that tells you how much money you will be able to control with your $1,000 deposit.
You need to multiply leverage with your deposit and you get:
leverage ratio 1:100 x $1,000 deposit = $100,000
Virtually on your trading platform you control $100,000 to trade and to make money.
But, one thing you need to know here is that you are not having $100,000 on your account which you can withdraw.
Leverage means you can open different lot size which will increase the pip value. Each pip you earn will give you different amount of money if you use different lot size.
$100,000 with leverage means you can open one standard lot size or less, which is defined as Volume = 1.00.
If you would have leverage ratio 1:200 which means you control $200,000 then you would be able to open lot size that is equal to Volume = 2.00. This increase would give you higher pip value.
If you want to learn more about leverage and how to leverage is connected with margin and lot size you should read the article What is leverage in Forex.
Leverage in Forex means to control more money than you have invested. While you are using money as a means to control larger sum of money, this leverage is financial leverage.
What Does Financial Leverage Means In Forex
In Forex, the leverage is used as a financial product which broker offers you to make more money.
You get virtual money as a financial leverage to help you increase the amount of money you are controlling with your deposit.
Leverage in Forex requires to have a certain margin to allow you to borrow the money through leverage. Borrowing the money you need to have margin that broker requires to accept your orders.
Without going further into the details about margin I suggest you read the article what is margin in Forex.
There are other leverage besides financial leverage and those are operating leverage. You can find more information here about what is operating leverage.
Leverage Meaning in English
If you take a look into dictionary about what is leverage meaning in English you will get a lot of results.
I have checked what does the dictionary tells about leverage in financial area:
“To speculate in (a business investment) largely through the use of borrowed funds, or credit, with the expectation of earning substantial profits; also, to mortgage (oneself or one’s assets) in this way”
Each result you will read will say same thing but in different area of your life. For example, in Forex you are using leverage to get more money by trading.
Leverage in Forex means borrowing the money to help you gain more money.
Another example is a fork that have longer shaft, providing better leverage. While you are eating you use force over fork which is leveraged to raise your food.
In your life you are using always some kind of leverage to solve the problem easier. If you have something to lift from the ground you can use lever and put it on your knee in order to lift it from the ground.
Your knee and lever are acting as a leverage to lift something from the ground easier than it would be without leverage.
High Leverage Meaning in Forex
High leverage in Forex means borrowing the money from a broker that is larger than 1:10 or 1:20.
Usual leverage in Forex that traders like to use is 1:100 and up to 1:500. even though, 1:500 is really large leverage in Forex, some brokers offers leverage high as 1:2000.
Using high leverage in Forex does not mean having more chances to make money. It will mean more that you will have higher chances to lose your money very fast.
If you are proffesional trader that knows what means leverage, you probably use leverage high as 1:10 or 1:20.
Beginners in Forex does not know what leverage means, but they know when you get something that is big it means bigger changes to make money.
Higher leverage is usefull tool but for those who know how to use it. Excesive leverage usually will destroy trading account very quickly instead increasing it.
Leverage in Forex means borrowed money to speed up the process of making money. It also means speeding the process of losing the money if it is not used properly.
In English leverage means using a tool to make the life easier. In finance in English it means using money to make more money.
Using high leverage in Forex means allowing yourself to control large sum of money that can give you high earnings. Being carefull when using high leverage will increase the chance to make money by trading on the Forex.
There are other important things you need to know about Forex so it is good to read trading basics about Forex.
If you want to know how leverage impacts on the trading results you need to download this pdf.