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Leverage and its Significance

In Forex, the concept of leverage refers to the situation where a trader borrows the money of the Forex brokerage firm and uses that money specifically for trading in the Forex market. Because of leveraging, a trader with just a small capital outlay is able to invest in significantly larger value contracts.

It is common to find Forex brokerage firms offering up to a ratio of 1:100 for an account holder. In contrast, in the equity market, a trader needs to come with 50% of the transaction value for every trade that they make.

Leveraging is all about profit maximization as well as risk minimization. With leverage, the Forex trader is able to profit more with each trade that he makes. At the same time, the risk factor of his transaction is also multiplied many times over and hence the need for proper risk management.

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