What is Forex Leverage
Many new forex like myself when I started did not know what leverage was did not know how to choose from 50:1, 100:1, 200:1, 500:1 and 1000:1 leverage yes 1000 leverage is that insane well let me explain what forex leverage is and why you have it. If you do not like reading you can check out the video.
I’m going to us real estate example. So let’s say you want to buy a home that is worth $100,000 but you don’t have all the money. So you decide to go to a bank to borrow the money. The bank requested a $20,000 down payment so they can lend you $100,000. You are now able to enter into ownership of a $100,000 Home. This is an example of real estate leverage. You have purchase a home at a leverage of 5:1 since $20,000 is one fifth of $100,000. Now lets say that your home in a couple of years goes up let’s say $150,000 in value and now you are ready to sell it.
$100,000 – purchase price
-$150,000 – current value
_________
$50,000 – you made a profit
Picture this if you would have just purchase a studio or a condo with your $20,000 and then try to sell it after a 50% profit increased you would have only profit $10,000. But as you can see the 5:1 property leverage allowed you to profit 5 times more than you would have if you traded without leverage.
Lets apply the same concept to forex trading:
You have $1,000 to invest so you decide to buy $100,000 of EUR/USD at a rate of 1.13352. the EUR/USD moves up to 1.13372 and decide to close the deal making a 20 pip profit. Using the formula in what is forex pip we can calculate that the total profit is $200. If we had not trade with leverage; we would have only made a $2 profit. So leverage helps to increase your profit more quicker but it can also have the opposite effect since your investment is at a higher risk. You can also lose as much if you don’t have proper money management
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