You may have come across the term ‘leverage’ whilst learning about forex trading. In forex terms, leverage means trading larger values of currency than you can actually afford to buy. Most brokers offer 100 1 or 200 1 leverage, whilst there are some forex brokers with 400 1 leverage accounts!  Make sense?  No, well let me explain some more.

Lets say you open a mini trading account with $1,000 deposit, and the terms of the account state that the maximum leverage you can use is 100:1, this means that you can actually buy $100,000 worth of currency with your $1,000.  You can then benefit from the gain you make on the movement of that amount of currency, meaning you can make more!  But hold on! It also means you can lose a lot more, and quickly!  Your losses are actually restricted to the size of your deposit, so you couldn’t lose more than the $1,000, but with the size of the trade, losing that amount could happen quickly!  Leverage increases the size of the gains and losses on your trades.

There are several ways, however, to manage the risk of losses on your leveraged trades. You must know when to enter and exit the market and what kind of movements to anticipate.  To reduce your risks further you can place something known as a stop loss order.

Stop-loss orders minimize your risk when placing an entry order. A stop-loss order automatically exits your position if the currency price reaches a certain point that you identify.  For example, if you are taking a long position, you would place the stop loss order below the current market price. For a short position, you would place a stop loss order above current market price. In effect, you are “stoppng your losses” at a certain point.

Hopefully now you understand the term leverage and how to minimise your potential losses with stop loss orders.  Leverage gives you the opportunity to make or lose more from a small deposit.  Always check the leverage offered by brokers when looking for regular forex accounts or mini accounts.

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