A lot of you might have heard of the forex leverage.
But what is leverage in forex exactly?
The forex leverage is a tool which multiplies the value of money invested in a position. It allows traders to move big capitals with a very small investment.
Forex trading is known to be the only financial instrument which allows a vast number of people to trade. This is mainly thanks to the financial leverage.
For instance, if a trader starts trading with only $100, thanks
On the other side it’s very important to mention that the forex leverage is a doubled-edged sword.
Why leverage in Forex is a double-edged sword?
The reason is very simple: if on one side the forex leverage multiplies the winnings, on the other side it multiplies the potential losses.
To understand this concept better just think about a $10 investment in EUR/USD with 1:100 leverage. If on one side the potential profit could be of $1000, the same multiplication must be applied to the potential losses too.
But let’s understand this better with an example.
Example of Forex Leverage
What is leverage in Forex?
Let’s make an example to understand it better in this tutorial:
Imagine a trading account with a selected forex leverage of 1:200.
Investing just $100 with the above set up allows you to move in the market a total amount of $20.000.
Why? Because we multiply 200 times the $100 invested.
This example shows why fx trading is so popular. It’s possible to have potentially big profits from a very small amount of money thanks to the leverage.
At the same time, it’s important to mention that high forex leverage can bring very high profits but at the same time high risks.
Different Types of Forex Leverage
Today in 2019, after the new Esma regulation in Forex trading, every Forex broker licensed in Europe must apply a maximum leverage of 1:30 to all the European clients.
For clients from outside Europe, the maximum leverage doesn’t have such a strict limit, but it is the broker deciding what to give to their clients.
To give you an idea, most of the brokers offer a leverage up to 1:400 and 1:500.
You can choose your leverage when you have opened your forex account. However, with a few brokers, the leverage can be set differently for each position a trader opens.
To see the different leverage offers go to the best forex brokers page.
To prevent the risk of losing everything due to a lack of experience or strategy, it’s always possible to train using a forex demo account.
What was the leverage in Forex before the new ESMA regulation
Since Forex Trading was born, each broker could decide the maximum leverage to offer to its clients.
Most of the brokers were offering a leverage from 1:300 to 1:500. This gave the opportunity to a lot of traders to start investing with a small deposit and open positions with small amounts of money.
Since 2018 the Europen authorities, monitoring the forex trading market for years, decided to introduce a new regulation to prevent people of loosing their money.
This is the reason the new regulation has been introduced.
What is leverage in Forex in 2019?
Since July 2018 the maximum forex leverage offered by trading platforms is up to 1:30 for the main currency pairs.
The leverage for cryptocurrencies is up to 1:5, and for other currency pairs, indexes and commodities go from 1:10 to 1:20.
This is a regulation which applies to all European trading platforms and only for European clients.
For instance, if a trader is coming from America, Africa, Asia or Oceania, this regulation does not apply.
The concept of leverage in forex is always been difficult to understand for a lot of traders.
This tool can be very profitable is well used, but very dangerous for not experienced traders.
It is always good to know what the chosen broker has as leverage and how to manage it.
Finally, at the end of this article hopefully the concept of leverage is clear and I hope we have answered your question: “what is leverage in forex”.