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How Leverage Works

Leverage is simple to understand once you get the basics down of what it really is.

Let's keep it simple, have you ever bought a car or ever thought of buying a car, but knew you did not want to pay the full price? So, what are your other options? Well, for most people, their option is to get a loan.

So let's say that you want a car that cost $20,000. You only want to put $5000 down. You get a finance the car for $15,000 by getting a loan from the bank. Within 24-48 hours you can drive off the lot with a $20,000 car with only having to pay $5000. The $15,000 is leverage because that is the sum of money that was not yours that you used to drive off the lot with.

The math for that leverage ratio is 3:1 For every $5000 you deposited, the bank matched it.So $5000*3= $15,000

We can do the same in Forex. Let's use the same scenario. You deposit $5,000 into your trading account, but you do not want to use the full amount to trade with. You choose a broker that gives you a desired leverage of 10:1 which is the lowest leverage you use in the United States.

What this means is for ever amount you deposit, the broker will match it up to 10. For this example,

$5000 * 10= $50,000. Which means you can trade with using your $5000 capital but you will be able to trade as if you have $50,000.

Pretty cool right. Now there are a few things to keep in mind using this example:

1. The $5,000 is the starting capital that the trader would invest

2. The leverage you choose from your broker can vary from as lows 10:1- the highest of 1000:1.

Every broker varies, but choose a leverage that best suits your trading needs. For newer traders it may be best to choose a leverage of 50:1.

3. Remember, the increased amount is not your money you can take out at any time. It is just an increase amount you can trade with. Please use risk management when trading.

If you are new to trading, here is an amazing book that will help you jumpstart your trading journey. It is called Trading In The Zone by Mark Douglas. Click here to view.


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