The leverage effect is an important aspect of currency trading offered by brokers, and most of them allow clients to invest money using borrowed capital. What is leverage? How does it work? What are the risks?
Currencies typically move in very small increments each day, giving traders the ability to make money on the FOREX market. Many online brokers offer traders the advantage of leveraging their trades. This means you can open positions on trades worth many times more than the amount of money you invested in your trading account. UFX trading gives you an opportunity to make use of different trading conditions (spreads, margins, leverage effects, etc.), depending on the type of trading accounts you have. Most brokers also provide traders with a variety of leverage levels from which to choose.
When the leverage effect is at 1:100, it means that for every $1 you invest on the market, your broker will invest $100. So, if you’re investing only $100 in total, you will have a market exposure of $10,000 with this leverage ratio.
Of course, the higher the leverage, the bigger your gains will be. For instance, a leverage of 1:400 will obviously earn you more money than a leverage of 1:100. But the larger the leverage you use, the greater your risk will be, too, as each pip movement on a currency pair price in the wrong direction will cause a greater loss on your trading account. So, while leverage is used to increase profits, it can also increase your losses. This is why you must use leverage with caution, as it can radically affect your balance.
Leverage works based on margin trading. As an investor, each time you open a position on the FOREX market, a small part of the funds in your account is set aside as collateral. The amount your broker sets aside is determined based on the size of your trade. You should definitely use money management tools to be sure you are controlling your risks, such as stop-loss.
Margin calls will happen when the margin on your account is no longer sufficient to cover the sum of your position, should the market move against you. You should receive a margin call when your account balance drops lower than the minimum required by your broker. When this happens, you will have to re-fund your trading account.