Leverage, in general terms, refers to a specific amount of capital that is borrowed with the initial expectation of generating more profit than the interest payable. In the forex world, leverage is a significant tool that lets a trader multiply their initial investment into a larger sum of money.
However, using leverage is not an easy task. Instead, an individual needs to know various aspects to use it fully. So keep on reading this and explore five amazing things about leverage you must know to reap maximum benefits. Please have a look.
Five things about leverage you must know
It is a double-sided sword
Most people new to the forex world consider leverage as a magic wand that will grant them thousands of dollars within a short span. At the same time, this thought is nothing else but a myth. Instead, leverage is a double-sided sword that can harm you if you don’t have proper knowledge regarding its usage. That means along with profits and gains, leverage can multiply your losses at a similar pace.
It grants you more control than you think.
Leverage helps to transform a rather boring FX marker into exciting. Usually, a trader observes a 10 percent move in their account within approximately one year. However, with leverage, a trader can observe a 10 percent move in a single day only. Hence, the higher the leverage rate is, the stronger your position is
Leverage amounts differ for each broker.
People usually think there is a preset value for leverage in the foreign exchange world. At the same time, the case is entirely different from this idea.
Each brokerage house offers leverage based on certain rules and regulations. Some typical amounts of leverage are 50:1, 100:1, and 400:1.
Professional traders work with low leverage.
Newbie traders generally wish to obtain high leverage. However, the professionals and experts advise you to work with low leverage as it protects your capital when you make mistakes and minimizes all losses.
Your broker will charge you interest
Leverage is a very useful and valuable tool. Hence, you will not get it for free like many other things. Instead, your leverage provider ( your forex broker) will charge you a specific rate of interest based on the leverage amount.
Usually, forex brokers charge a fee between 1 to 2 percent of the leverage amount every year. Yet, this amount varies from broker to broker. For instance, etoro brokers, which are very well-known brokers in South Africa, ask 1 percent leverage on etoro minimum deposit south africa
Final words
In a nutshell, leverage is a crucial tool in the foreign exchange world. Forex traders widely use it to maximize their investment to catch higher gains.
However, it is a double-sided sword, and one must never use it without proper knowledge and experience. We have mentioned five essential things you must know about forex leverage to eliminate the risk of losses.