What is leverage

hi i am a newbie and i wish to know what is leverage and how it works?thanks for your replies

Leverage for the purposes of trading is basically about putting on a position larger than your available funds. In the case of forex, your broker allows you leverage by letting you only put up a small % of the position size you want to do.

Here are a couple of websites that let you calculate the cost of a trade for a given leverage percentage.

Instaforex leverage calculator

That one the VOLUME they use 1 = 10,000 units of a currency.

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The Alpari Calculator uses the more standard 0.1 = 10,000 units of a currency.

These 2 will calculate your price to control X amount of volume of a currency based on the currency and the leverage (1:50, 1:100, etc) you are allowed or want.

These should you understand it in practical terms.

Steven Currie

In forex, leverage is like a loan provided by broker to trader. That is why with a small deposit such as \$2000 and a leverage of 100:1, means you have a \$200,000 available for trading and you have enough capital to trade one standard lot on a currency. So if you are buying one standard lot (100,000 units of currency) on gbp/usd at the price 1.61000, and it went up to 1.62000, then you will gain a profit of \$1000.

Leverage in forex is NOT like a loan. In stock trading that is exactly what happens - your broker loans you the difference. In forex there is no lending. You are just putting up a surety deposit to protect the broker against losses you may suffer.

“Leverage is a loan that is provided to an investor by the broker that is handling his or her forex account.”

How does leverage work in the forex market?

Thanks for pointing that out. Now I can tell them they’ve got it wrong.

In simple words leverage is the maximun loss you can have on a single position. If you have 100 usd and trade 0.01 mini lots you are using in theory 1:1 leverage but if you are in a losing position your leverage increases. Take my advice, don’t use leverage.

Regards.

Don’t use excessive leverage would be more appropriate.

Well, if you would open a buy order in GBPJPY since 2011 you would have something like -10 000 pips without mentioning rollover, that is a clear example of leverage too.

Regards.

Still think Gordon Gecko’s definition of leverage is the best “steroid banking”

pips have nothing to do with leverage. leverage affects the price per pip but not the pip itself. I am pretty sure you know that but I figured I would toss that out there as it could give a newb the wrong idea

Sorry, but that is the ugly truth, leverage magnifies your loses, depending on the time frame you use if you risk only 1% you will not use more than 1:5. Leverage is suppossed to be the amount of money broker borrows you, for example with 1:100 they supposed to borrow you 100 Usd for each dollar you have deposited. But what makes you think you are dealing with real currencies. When you open an order you are not buying nor selling anything. You are just betting the numbers goes to your favor nothing more, not even ecn brokers deals with real currencies, they pass the orders to a liquidity provider or another trader, it is just a switch of papers, nothing more. When you buy someone has to sell and if there is not matching order the broker itself becomes the counterpart, there is not natural buy or sell. And there is when leverage comes in, it is just a tool to the trader when positions goes negative to go much more negative, basically with high leverage you are allowing to the market just take your entire account, small leverage you just allow to take a small fraction.

Sorry but this is not for missinformed people. Leverage is not what you think it is. Leverage is not a borrow, it is a tool to increase your margin level, the how much you can lose before your order is canceled by the broker. Sorry but most advanced traders ignore this fact.

Regards.

Leverage is the ratio of the actual position size vs. how much you put up to keep that position open.

Let me give you an example with trading stocks, though the mechanism behind it is different from trading FOREX, the end results are the same.

Let say you want to buy 1000 shares of company ABC, currently trading at \$10. To do this, you need 1000 x 10 = \$10000

However you only have \$5000 in cash. But luckily, your broker is happy to provide the other half.

So there you go, you have used leverage.

your actual position size is \$10000
the amount of money you put up to keep that position open is \$5000
you have a “2 to 1” leverage.

In forex some broker provide 200 to 1, even 400 to 1 leverage. Which means to open a \$10000 position, all you need is \$50 or even \$25!

Since you are a newbie, perhaps you can head over to the pipsology section and review the info listed there. As a newbie, you may find some of the info on the side of “geek vise” but all the pertinent info is listed there. And you may want to start with a demo acc, before anything else

Indeed, in this case is a borrow, you are buying stocks, a participation over a company, a share is one vote on the company board, if you ask, your broker will issue stocks certificates for you to use it as you wish, to take a loan for example tyou can use your stock certificate as a guarantee if the lender accept it as such. But in forex is a differen thing you are not buying anything, just pure and plain numbers and broker does not borrow you a single penny. You cannot use an open position for anything, they are just numbers.

Regards.

But in the end, it’s all the same right?

I think regards to forex, it’s not simply numbers. The big banks give institutions and brokerage houses line of credit.

That’s because at that level you’re talking about a market where actual currency trades hands, so the loan is to actually buy something. In retail forex you aren’t ever actually owning or exchanging anything.

Exactly. That is my point.

So essentially, retail forex becomes a casino for us traders?