Leverage and how it works

Unless you have a really high sum of money to invest in FOREX market, you would want to know what is leverage and how does it works. With leverage Forex trader can make large amounts of money without having a large trading account. Its basically Virtual money you would be using to trade. Say for eg. a broker offers you a leverage of 100:1 , what it means is that while you would be investing 1$ of your hard cash there would be an actual investment of 100$ in the forex market i.e. 100times of whatever you invest. Thus, funding your account with $1000 at 100:1 leverage would enable you to operate a $100, 000 account.

If you had 400:1 leverage and took control of $100,000 with only $250, with positional of just 1%, you would make an amazing $1000 (1% increase!). Sounds quite interesting, 400% profit, isnt it? Then why is leverage called a double edged sword? Now imaginge a 0.25% decrease which is quite usual with forex market, and you loose all of your 250$.

While it is possible to make profits with virtual money in Forex, it is absolutely impossible to lose virtual money, you lose only real money that you have invested or earned as a result of profitable trading. Considering the profits involved leverage is worth the risk. If it works for you, you would be making 100times profit; if it doesnt your broker might simply freeze your account until you pay up for the margin.

Brokers offer different levels of leverage. Some may offer leverage as low as 40:1 while some may offer upto 400times.