Leverage is a powerful tool in forex trading that allows traders to control a larger position size with a relatively smaller amount of capital. It magnifies both potential profits and potential losses. Leverage is expressed as a ratio, such as 50:1, 100:1, or 500:1, indicating the multiple by which a trader's capital can be increased for a given trade size.
Example:
Suppose you have $1,000 in your trading account, and you decide to use leverage of 50:1. This means you can control a position size of up to 50 times your initial capital, or $50,000.
Without Leverage:
- If the currency pair moves 1%, your profit or loss would be $1,000 (1% of $1,000).
With 50:1 Leverage:
- With leverage, the same 1% move in the currency pair would result in a profit or loss of $50000 * 1% = $500.
