What is Leverage

What is Leverage

What is Leverage?

One of the key aspects of Forex trading is the ability to trade using “leverage”. It determines the required margin and amount of funds traders need to have in their trading accounts in order to take a position. Put simply, leverage allows you to take a position of much higher value than the monies deposited in your trading account so in other terms, a higher leverage means a lower margin requirement to place a trade.

How does leverage work?

You have a trading account with GO Markets with a balance of $10,000. If you have a trading leverage of 30:1 and wish to use $1,000 on one single transaction as the margin, then you will have an exposure of $30,000 in your base currency ($1,000) = 30 x $1,000 = $30,000 (trade value). The concept here is that GO Markets have temporarily given you the necessary credit to make the transaction you are interested in making. Without this margin, you would only be able to buy or sell transactions of $1,000 at a time.

Thus, the leverage facility allows you to potentially make large profits from a relatively small initial investment.

Monitoring your Risk Exposure

It is imperative to understand the risks involved in trading Forex using high leverage and traders must find the appropriate level that suit their trading styles as the effect of leverage is that both gains and losses are magnified.

Some FX traders use Expert Advisor(s) (“EA(s) “) to trade, and popular EA(s) often include money management tools designed to place the correct trade volume based on the size of the account. However, not all EA(s) feature these tools so it important that traders supervise the trading activities on their accounts and make any margin payments as they become due.

Increased leverage carries a greater risk and the potential to make significant losses on very small movements in the Forex market.

Based on each your margin requirement, the trading platform will calculate both the funds needed to retain your current open positions and the funds required to enter into new positions. However, as stated above, it is your own responsibility, not GO Markets’, to continually monitor your positions. If the equity in your trading account falls below the margin requirement, a ‘margin call’ will ensue, and we may close all your open (from the biggest losing) positions to limit your risk to usable margins.