What Is Leverage In Trading Forex and How Does It Work?

We’ve all heard the talks about leverage, but in this video, I want to go over leverage for beginners so that way you get a better understanding of what this actually means. Because it is very important when you’re doing anything in the investment space. Because there are so many opportunities and offers that give us the ability to use this double-edged sword, a thing called Leverage.

Without further ado, let’s jump right in.

Welcome! If you’re new to the channel, my name is Matt Jimenez. I’m an entrepreneur who has worked with the greatest minds in finance over the last several years, and I’m here to pour into you guys everything they poured into me.

And in this video, I’m going to go over a very important word. And this word is called Leverage. And the reason being is because when you’re in the investment space, Leverage is a very talked-about topic. And in fact, it’s implemented into many strategies across the board to gain an edge or get wiped out. Yes, you heard it correctly: Leverage is a double-edged sword. But let me break it down in a very simple way so you can understand how leverage is used.

Because you have tons of brokers offering leverage. And in this explanation, I’m going to try and keep it as simple as possible. So what is leverage in trading? The easiest example that I could think of is, let’s say you want to buy a TV and the TV costs $100, but you only have $10. So you have a friend that will lend you $90. So you’re taking on $90 to acquire a TV that’s $100, but you only have $10. It’s essentially allowing you to have the ability to buy something that you actually cannot afford.

And the way this translates into markets is you have leverage settings, and they often look like 1 to 200, 1 to 50, 1 to 1,000, and it varies. In America, it’s very hard to find anything over 1 to 50. But overseas, it’s very easy to find things that are 1 to 100, 1 to 1,000, and I’ve even seen 1 to 2,000. And what that means is for every one you’re leveraging 2,000 or 1,000, whatever that second number is, that’s the amount of leverage that you will be able to control.

So if you have $1 and your leverage is 1 to 500, you’re able to leverage $500 for your $1. As you could see, this is very advantageous because it seems like, ‘Oh, I can get so much more on my money.’ But also, this will work against you because with leverage, you also need to have enough margin. And margin is your money in your account because if you don’t have enough, you will often get margin calls. So the larger the leverage, make sure that you’re not using it all because you need enough margin to sustain the fluctuations in the market or, like I said, you’ll get margin calls.

If you don’t know what margin call is, it’s essentially your broker taking you out of the trades because you don’t have enough capital in the account to manage the open positions. Let me reiterate, so 10 to 1 leverage means you can control $10 for every $1. And the bigger the number, the more you’re managing with $1.

Let me give some more examples of it playing out in an active trade. Let’s say you have $100 in a trading account, and you want to trade with 50 to 1 leverage. This means you can control a trade worth $5,000. And if the market moves in your favor with that trade, you will be rewarded with immense amounts of profits because it’ll be based on the full $5,000, not just the $100 in your account. The $100 in your account is the margin, which will allow you to leverage the $5,000 trade that you just took on. But remember, if the trade moves against you, your losses will also be based on the $5,000 that you have leveraged.

Now let’s dive a little bit deeper into the pros and cons of leverage, especially higher leverage like 500 to 1. 500 to 1 is considered definitely to be on the higher side of leverage because it’s allowing you to manage such a large sum of money with a very little bit of money. And like I said earlier, this would allow you to control $500 for every $1 that you have. And the greater the potential profits, the greater the potential loss. And in most cases, higher leverage will always R your account because of the volatility and uncertainty in markets will typically wipe out all the margin that you have in the account.

So I actually highly advise against taking on leverage. I like the ability to have high leverage, but I adhere to never taking on the highest amount of leverage. So if a broker is offering 500 to 1, yes, I may select that option, but I’m not actually going to use that full amount to its max capacity because I never want to put the full account at risk in terms of uncertain markets or extreme volatility. Even if the trade is right and the trade moves against you, if you have high leverage on that position, your account will be wiped out because you need to manage the amount that you’re leveraging. So this is why I say it’s a double-edged sword.

But let me be specific with some of the pros: it will definitely amplify your profits. It’ll give you more access to opportunities. Reason being is because you could actually take full advantage of a very small movement in the market and make a large sum of money. Like let’s say a stock went from $1 to $2. That move may not be a tremendous move, but if you have max leverage on it, you’re going to get tremendous returns. And third, it is an effective use of capital because it’s going to allow you to leverage a small amount of your capital to control a large amount of capital that’s not yours. But again, it is at risk.

Now let’s get into the cons of that. Number one: magnified losses. And in most cases, I’ll say this unfortunately it’s more likely than not. Number two: we all know this, a substantial increase in risk. And number three, like I mentioned earlier, you’ll get a margin call. So let me explain margin calls. When trading, you need a minimum balance in the account at all times to keep your trades open. If your account balance falls below the minimum required amount that the broker set for you, then you will get a margin call. And like I said earlier, it’s basically your broker saying, ‘Hey dude, you’re taking on way too much risk and you don’t have enough money in the account to take on all of this leverage, so we’re actually going to stop you out.’

So there you have it. That is leverage in a nutshell. And I hope that I was able to explain it in a very simple way. They say somebody who could take something complex and make it simple is the one who actually understands it. Don’t know if I did a good job, but if I did, please give me a thumbs up and/or comment. And if you want to never have to worry about leverage, just go ahead and hit the link down below and let the software worry about it for you.

And like always my friends, peace!

Please visit What Is Leverage In Trading Forex and How Does It Work? to watch the full video on YouTube!

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