“Leverage” is one really important trading tool for investment.

The “Leverage” will simply increase the available trading volume in your account.

Think of it as a trading tool to give you more trading opportunities with small funds.

If the leverage of your account is 1:100, then you can trade 100 times more, online than the actual amount of your funds in the account.

Trading without the leverage

For example, if you are not using the Leverage, as in the leverage is 1:1, you can only trade up to the amount of your fund.

Let’s say your account balance is 1,000 USD and the leverage is 1:1.

In this case, you can only trade up to 1,000 USD worth of position because that is the amount you have in the account.

1,000 USD equals to 0.01 lot in Forex unit, and it is the normally the minimum trading volume available with majority of Forex brokers.

With only 1,000 USD, you can barely make profits by trading Forex.

Trading with Leverage

Let’s say your account balance is 1,000 USD, and the leverage in your trading account is 1:500 which is the average leverage among online Forex brokers.

In this case, you can trade up to (1,000 * 500) USD which is 500,000 USD.

500,000 USD isn’t an amount which everyone can afford to invest with, but still you can trade such large amount in Forex markets.

“Leverage” using the account balance as collateral

So where exactly the extra money comes from?

“Leverage” is the ability you are given by your Forex broker to increase the trading volume.

Instead of you being able to trade higher volume according to the leverage, you are required to have minimum margin(equity) in your trading account.

If you have 100,000 USD worth of position with 1:500 leverage, then the required margin(equity) in your trading for the position is 200 USD.

If the account balance goes below 200 USD, you will be warned or the position will be closed by the system automatically.

Increasing the Leverage also means increasing the risk.

You are always recommended to take risk management measures to protect your funds.

For your information, the highest leverage in the world, 1:3000 is offered by FBS.

List of Forex Brokers