HFM information and reviews
HFM
96%
FXCC information and reviews
FXCC
92%
FxPro information and reviews
FxPro
89%
FBS information and reviews
FBS
88%
XM information and reviews
XM
86%
Exness information and reviews
Exness
86%

IronFX: Leverage in Forex. Complete Guide


Leverage is simply borrowed funds that traders use to trade. In other words, it refers to the ability that traders have when opening an account with a forex broker, to borrow funds in order to trade with a bigger amount than what they have initially deposited in their trading account. In this way, they gain a larger exposure when trading in the financial markets, with a relatively small initial deposit.

Leverage in trading is a double-edged sword. It enables traders to potentially magnify their profits if the market moves in their favour, but losses as well, if the market moves against them. This happens because both profits and losses are based on the full value of the position rather that the deposit amount only.

Leverage & margin

Margin is the amount needed to open a position. In other words, it is the amount needed to open a trade with leverage. Trading forex on margin means that you are only required to pay a portion of the total value of the position, which will be considered a deposit. Margin rates usually start at 3.3% for the most commonly traded currency pairs such as EUR/USD or GBP/USD, but this differs between CFD brokers.

It is a well-known fact, that the foreign exchange market offers low margin rates, hence high leverage ratios, compared to other assets. In fact, if we compare forex and stocks, the leverage difference is much higher.

Leverage in the stock markets starts from 5:1. This makes forex quite attractive for traders who are into trading with leverage. In fact, a 3.3% margin rate for example, means 30:1 leverage which in turn means that for every dollar in a trading account, traders can trade up to 30 dollars.

How does leveraged trading work?

As already mentioned, leverage is when using debt to trade and results in potentially multiplying one’s returns or losses. Both traders and companies use leverage. The former use it to potentially boost their profits while the latter use it to fund their assets in the attempt to boost shareholder value.

Leverage works by using margin to give you a much greater exposure regarding a specific asset, as already mentioned. What you are actually doing, is providing a percentage of the total value of your trade and then the broker is lending you the rest. The exposure you gain is also known as leverage ratio.

For example, let’s say you have 10 thousand dollars in your trading account, and you want to invest in a company that is trading at $50 per share. If you buy shares with just the cash you own, you could afford 200 shares whereas if you use margin and borrow $10,000 from a forex broker, you could afford 400 instead. If the share had a 10% increase, you would earn a 20% profit if you had invested with cash while with margin, you would earn a 40% profit. Nevertheless, if the share decreased in value and dropped to $40, you would lose $2,000 with cash and $4,000 with margin. Keep in mind that you always need to pay the broker back for the borrowed money.

Benefits of using leverage

One of the main advantages of trading with leverage is that traders get to increase potential profits by only putting down a percentage of the total value of the trade so as to receive the same profit as in a normal trade. Remember to always consider the full value of the trade and the possible downsides.

Moreover, trading with leverage can make capital committed to other investments available. The ability to increase the available investment amount is also known as “gearing”.

Additionally, the ability to trade with leveraged products to speculate on how the market moves gives traders the ability to take advantage of both falling and rising markets, which is also known as going short. Finally, leveraged trading is available around the clock. Although there are various trading hours that differ from market to market, some other markets like forex, indices and cryptocurrencies are available 24/7.

Risks of using leverage

To start with, trading can increase losses as well. It is very likely that traders will forget the amount of funds they are risking because the initial amount is relatively smaller compared to conventional trades. So, as already mentioned, you should always consider the full value of the trade as well as possible disadvantages so as to develop risk management steps.

Furthermore, trading with leverage means that you are not in a position to actually own the asset, so you have no shareholder privileges.

What is more, in the case that the market moves against you, the broker you are working with may require that you add more capital to keep the trade open. This is commonly known as “margin call”. There are actually two options here. You will either exit the trade or add money to lessen the exposure. Since when using leverage, you are basically borrowing money to open the full position but at the deposit cost, there can also be small fees that can be charged to cover the costs in case that you want to keep your position open overnight.

How to manage risk

As discussed throughout the whole article, leverage involves the risk of losses exceeding your expectations. However, there are various risk-management techniques that can be used to limit potential losses. A stop-loss order​ aims at limiting losses in a market that is not so favourable, by making you exit a trade that moves against you based on the predetermined price. What happens with stop-loss orders is that you basically determine the amount you can afford to risk. Nevertheless, keep in mind that since markets move too fast, there might be specific conditions that may not trigger your stop-loss order at the set price.

For the reasons outlined above, new traders should maybe start with leverage once they feel familiar using it and first practise using a demo account.

#source


RELATED

How to Trade Major Currency Pairs

The major currency pairs traded by forex traders around the world are the following: EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/CAD, AUD/USD, NZD/USD...

How To Set Financial Goals In A Crisis

Clearly setting goals is an important step on the road to financial success. They, unlike abstract desires, will definitely work. At all times, you need to be serious and conscious about this question...

What is a Fan Token?

With the invention of social networking sites such as Facebook, Instagram, and YouTube, you can now engage and connect with famous people continuously. The cryptocurrency industry...

What is a moving average and how do I use it?

Moving averages are one of the easiest types of technical indicator to understand and use. They provide a simplified view of the price action of an asset, with most...

Basic Concepts Of The Stock Market And Their Applications

A stock market is a trading floor where stocks listed by companies are traded through direct exchanges between multiple parties (OTC). This kind of interaction...

What is forex scalping? Understanding the ins and outs

In the forex industry and investment world, scalping refers to trading currencies based on a set of real-time analysis. The idea and purpose behind this, is to make profit through buying...

Beginner’s Guide to Indices Trading

An index tracks the performance of a group of securities or assets, based on predefined characteristics and features. Indices can be organised around industry...

What Is the OTC Market?

Over-The-Counter markets are popular among investors and traders. This term is mostly associated with the trading of company shares. Yet, it's possible...

How to Choose the Best Forex Broker

Choosing the best forex broker to open a trading account is quite hard as there are numerous choices available online. Although competition is very high pushing brokers...

What are derivatives in finance?

When referring to derivatives, it is about financial agreement that establishes a value through the value of an underlying asset. This means that they have no value...

What Is Bitcoin and How Does It Work?

You must have heard about it. The first and most famous cryptocurrency has been in the headlines due to a vertiginous increase in value, breaking the threshold of $1,000 for the first time on 1 January 2017...

How to Stop Exiting Trades too Early

One of the biggest struggles traders face daily is the temptation to exit trades too early. There are numerous reasons one might opt to close a trade too early, ranging...

Swap, Spread and Everything You Need to Know about Forex Market Commissions

It comes as a surprise for many newbies to see a negative balance when they open their first trade, although the price has not moved. It comes to...

How to start trading in Forex for free: first steps

A simple web search query "how to trade in Forex" will yield dozens of on-site and online classes for beginners and traders of various experiences...

Slang and financial markets: animals in trading

Animals and the money: Octa broker gathered the most popular slang words in financial markets.

How to Use Orderblock in Forex Trading?

An order block represents the process of collecting orders from financial institutions and banks. The forex market relies on central banks and major financial institutions...

Is Demo Trading Really Worth It?

There is an unfavorable outlook on demo trading merely for the fact that you can’t generate profit with virtual money. A lot of traders essentially...

Choosing the right trading account

The forex market is no longer a space reserved solely for banks, financial institutions, money managers or hedge funds. Instead, individual traders also have the ability...

Unknown facts about the US dollar

The US dollar is the most popular currency in the world. About 90% of all financial operations are conducted with the US dollar on exchanges, and the rate of this...

Unlocking the Power of Fibonacci Retracement: A Beginner's Guide

Trading with Fibonacci retracement might sound daunting, but it's a remarkably valuable tool once you grasp its fundamentals. Let's delve into the key concepts and step-by-step guidance...

Vantage information and reviews
Vantage
85%
FP Markets information and reviews
FP Markets
81%
IronFX information and reviews
IronFX
77%
T4Trade information and reviews
T4Trade
76%
Just2Trade information and reviews
Just2Trade
76%
FXNovus information and reviews
FXNovus
75%

© 2006-2025 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.