In Forex, traders or investors using leverage to gain profit from the fluctuation of exchange rate between two different currencies. It allows traders or investors to control a larger asset with smaller down payment and loan the rest of the capital. The best example of demonstrating leverage is buying assets such as car or houses. A person might be able to own a BMW with a down payment of maybe $15,000.00 instead of $80,000.00; provided if the bank agrees with a reasonable offered leverage – hence this explains the definition of leverage.
After an investor has opened an account with the broker, he would be required of deciding his preferred leverage for his respective account. The usual provided leverage options would starts from 50:1, 100:1, 200:1 until 1000:1. If an investor / trader choose 100:1 as his preferred leverage, it means that his account would have the ability to trade up to $100,000 of currency with a margin of $1,000 (1%).
Although the ability to great profits by using leverage is substantial or possible, leverage would actually works as a double edge sword that might bring damage to the trader. For instance, if the trader traded mistakenly by traded a suppose-to-be rising currency while in actual the currency goes the opposite direction against the trader. The leverage would greatly amplify the potential losses. In order to prevent such catastrophic event, all traders are advised to choose a leverage range which is suitable for their maximum risk and must implement a mandatory trading style that includes the use of STOP LOSS and Limit Orders.