The term leverage refers to both a mechanism for making a much larger position than that corresponding to the money an investor has actually, and expected profitability of a financial derivative or forward transaction compared to the profitability of transactions only on underlying assets of these products or these future operations.
The leverage associated with Forex is much higher than that offered on other financial markets such as stock markets or commodity markets.
Currency volatility rarely exceeds the threshold of 1% per day, which is considered in the Forex like a rather significant movement. Leverage allows making significant changes from relatively small market gains. Moreover, very often, currencies are traded by lot (the amount of a standard lot is 100,000 units of account for a classic margin).
The use of leverage is almost needed to invest and make money in Forex. It is necessary that transactions are significant enough to take advantage of differences in prices.
What is this leverage?
Leverage is offered by brokers in Forex in the form of prizes. It is possible to get a position in the Forex for a total of $ 100,000 with a deposit equivalent to $ 1,000 account. This is called leverage.
Different leverages are available from brokers. The effect of leverage allowed may vary depending on the broker from 20 to 400 times the amount deposited into the account of the investor. Each investor has the possibility to choose their leverage in terms of its risk aversion and the search for yield.
In turn, the greater the leverage, the higher the risk is important.
Indeed, each change pip (point of Forex trading) in the opposite direction from the position taken by the investor will result in a loss all the more important that the leverage will be. If prices are moving to the detriment of the position taken by the investor may incur a total loss of its funds. The leverage is used with caution and reserve.