There is a lot of debate amongst traders about whether leverage in Forex trading is a good thing or a bad thing. In my opinion, leverage is not just a good thing but an essential thing. Obviously risk and money management, with a dose of common sense, is needed when trading with leverage.
What is leverage?
Leverage enables traders to trade with margin, basically allowing you to hold positions with a small percentage of the actual position size. With leverage I can hold £100,000 positions with as litlle as £1,000, resulting in very large profits (and the risk of very large losses!).
How do I trade with leverage?
In Forex trading, leverage is usually provided by a Forex broker. Most brokers offer anything from 1:2-1:100 leverage (50%-1% margin). Some brokers offer up to 1:500 leverage (0.2% margin). There is usally a financing charge for using leverage.
Why is leverage needed in Forex trading?
Leverage is needed in Forex trading as currencies are not volatile enough to create substantial profits, especially with small retail accounts. The video below explains this in much more detail...
Leverage is a killer!
Some believe that leverage is very dangerous when trading Forex and that an absolute minimum of leverage should be used. I personally believe that position sizing and strategy are key, no matter how much leverage you may be using risking 1% per trade is a key to trading survival, having a strategy is key to profitability, leverage is just a means to enable us to trade.