IB/MIB Application

Leverage

Leverage simply means the percent amount of money you are allowed to borrow from the broker when you open a position. Typically in Stock market when you buy 100 shares of a company trading at $10 per share, you are required $1000 to open the trade.

In forex, traders use leverage to profit from the fluctuations in exchange rates between two different countries. The leverage that is achievable in the forex market is one of the highest that investors can obtain. When a trader decides to invest in the forex market, he or she must first open up a margin account with a broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, depending on the broker and the size of the position the trader is trading. Standard trading is done on 100,000 units of currency, so for a trade of this size, the leverage provided is usually 50:1 or 100:1. Although the ability to earn significant profits by using leverage is substantial, leverage can also work against traders. For example, if the currency underlying one of your trades moves in the opposite direction of what you believed would happen, leverage will greatly amplify the potential losses. To avoid such a catastrophe, forex traders usually implement a strict trading style that includes the use of stop and limit orders.