Guys i am planning to open a new forex real account but i am unable to understand what is the meaning of leverage 1:200, 1:100,1:50 and 1:500.
can someone explain?
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Your ratios are actually listed backwards but you can think of it in terms of $1 controls $N of currency. Alternately, the margin requirement for your positions will be 1/N.
Boss i cannot understand what u said…can u please be more clear.
Or can someone explain it step to step clearly…???
Hi Karthik0044,
To understand leverage you first need to have an idea of what you are trading. In forex you will be working with “lots” of a certain currency. If you are trading for example the GBP/USD, it would make no sense to trade 1 pound as the potential profit would be nothing. This is why you will be working with lots through your broker (whoever you are opening you account with).
You can consider “leverage” as a loan which your broker is making you in exchange of a small sum (what you will be funding your account with) of money. The leverage depends on the broker, and then on your account’s settings.
Example of leverage 100:1
Assume that you open an account with $10,000 dollars.
This means that for every dollar that you put into your account, you can trade $100 worth of pips. With 10,000 dollars you would be capable of trading lots woth $100,000. In the case of 100:1, for each dollar that you have in your account, you can virtually buy 100 dollars worth of a lot.
200:1
For each dollar you have in your account, you can buy 200 dollars worth of a lot
And so on.
My recommendation is to go through the learning courses that they offer here at babypips. In the first section you will get a clear idea of what leverage means and how to relate it to the size of your account and be able to calculate potential profit and loss 
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Not really. Leverage is simple. For every $1 in your account you can control some $X where X is greater than 1. For example, 100:1 leverage means you control $100 for each $1 in your account. If you have $1000 in your account you can control $100,000 in positions.
You can consider “leverage” as a loan which your broker is making you in exchange of a small sum (what you will be funding your account with) of money.
This is just flat wrong when talking forex (or futures, but more or less correct for stocks). Your broker isn’t loaning you anything.
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Hi Rhodytrader,
I like your explanation of what leverage allows you to do. Simple and straight to the point.
Regarding seeing leverage as loan its just figurative speech. Actually they use this example in the school of pipsology. Here is the link and here is how
they describe it:
“. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep.”
What is a Pip? What Other Forex Trading Terms Do I Need To Know?
I do understand that no one is lending you money but this is a nice beginners approach just to get the idea of what leverage means.
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I also recommend you to follow this link Karthik0044. Look under the concept of leverage and continue on with the chapter to get a clearer idea:
What is a Pip? What Other Forex Trading Terms Do I Need To Know?
We could get into a semantical discussion on “front” vs. “loan”, but both are technically incorrect. In spot forex trading you never actually buy or sell anything, you just agree to do so in the future (like in the futures market), with that agreement getting rolled forward daily so you never actually have to fulfill your agreement to do the currency exchange. Since no currency ever actually changes hands, there is no fronting or loaning or anything like that. Margin is simply surety that if the position goes against you the broker doesn’t end up footing the bill for your losses.
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Hello Karthik,
If I’ve noticed anything about the Forex so far, it is the fact that Forex should be kept simple.
So, in simple terms, your question of 1:200, 1:500 simply means:
[B]1:200[/B]
With $1, you can control 200 times the amount of $1
This means that $1x200 = $200
Similarly, if you have $1000, you are controlling 200 times its worth
This means, $1000 x 200 = $200,000
This whole idea of 1:200, 1:500 is called LEVERAGE
It gives you the opportunity to control large sums of money with little money
Hope this clarifies your doubt
Regards,
mez
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I have one question, not so much regarding “what is leverage” as I understand the above.
Just to clarify really, if I were to invest say $100 and my broker offers 200:1 leverage - Is $100 the most I could actually lose? i.e. Say I used my entire margin of 200:1 with my $100 and it went bad on me, would I end up “owing” the broker, or would I simply lose my initial $100 and no more?
Someone please correct me if I’m wrong here…
If you used all $100 at 200:1, you would have a total position of $20,000. At $2 per pip, a move of 50 pips would result in a loss of $100. However a broker will only allow you to fall to a certain percentage of the required margin, at which point it will initiate a margin call, liquidating your position in order to prevent your account from going to or passed $0.
So if a broker requires you to maintain 30% of the required margin, once it hits that point (a move of 35 pips) your position would be closed, leaving you with $30.
Some brokers will provide you with a notification prior to reaching that level so that you can either minimize your position or add more $'s to your account in order to satisfy the margin requirements, however a certain level of loss will trigger it immediately.
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You probably shouldn’t do that.
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Good explantion. Thank you Dreadart.
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Welcome to the forum, but [B][U]please[/U][/B] don’t bump threads in which the previous post was 4 years ago just to say “thank you” to people. When people do that, it means those threads occupy a front-page position, displacing something else more relevant and current. Thanks for understanding.
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Most sensible people would not argue the semantics between “fronts” and “loans” when it comes to the the clear context. Since the explanation is given to avoid technical jargon in the first place, the statement of expalnation need not be technical, becasue the whole point of the explanation, is to avoid technicalities in order to simplify a concept.
From an academic perpective, consider the Historical Jesus who was recorded as giving parables that have no “direct” or “exact” relationship to the topic He was trying to ilustrate. Yet the parables nonetheless served as the perfect illustration for those who were not au fait with such ideas.
Thus, if somebody today uses a parable or similar simplified illustration that describes the trading concept of 500:1 etc, by “lending” of “fronting” another $100,000 to buy something, then fronting and loaning in this context mean exactly the same thing even though technically, they may not be the same since “fronting” can have negative connatations linked to crime, which Im sure pipsology would not be advocating. Therefore, in this instance it helps to have common sense, and let ones ego get in the way sinse nobody likes a nit-picking, sematic-bashing, smart-ass that really knows jack.
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Clear semantics is a basis for a clear explanation, so that’s what “sensible people” should always strive for. There’s no other way about it. Parables muddle things up because they mean different things to different people, and are only good for those who want to avoid giving a straight answer.
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Wow, I had never understood the concept before. Thank you for explaining it so simply.
correct me if i am wrong
leverage just means you can borrow more on the margin
if it is 1:100 and you trade 1 lot, your used margin will be exactly 1 lot, say xag/usd is $30, 1 lot = $30 margin used
if you are using 1:500 and you trade 1 lot, your used margin will be 1/5, say xag/usd is $30, 1 lot = $6
so now you would spend $30 to buy 5 lots of xag/usd, $30 margin used, but if the trade goes haywire, your losses is 5x, if profitable it is 5x with the same amount of leverage used as 1:100 for one lot
I’m not a professional trader at all I don’t even have a live account myself but I would probably advise you to keep learning and using demo accounts for now if your not sure of even the basics, but good luck in the future.