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Understand forex leverage.One of the features of forex markets that differentiate it from other financial markets is the astronomical level of leverage that is commonplace in the forex world. What’s so special about Forex Leverage? Know the forex market. First practice on your forex demo account.

Forex brokers can offer up to 400:1 leverage on the average retail trading account. This means that $1 in a trader’s forex account can control up to $400 in a currency trade. The implications of this are mind boggling. No other financial market offers even close to this level of leverage.

Forex leverage is a double edged sword. Forex leverage can both be a very positive feature as well as a very negative one. By definition, leverage is type of financial magnification. While it is true that high leverage magnifies profits, it also magnifies losses equally.

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Often, this high level of leverage summarily wipes out otherwise healthy trading accounts. Used with a great deal of caution, however, high leverage of the magnitude found in forex trading can offer tremendous possibilities to the upside as well as the downside.

Common leverage ratios offered by forex brokers range from 50:1 on the low side all the way up to 400:1 on the high side. The sheer magnitude of this leverage, even on the lows side, far eclipses, the amount of leverage available in other financial markets.

Suppose that 400:1 leverage is utilized. In practical terms, what this means to you as a forex trader is that a standard lot of $100,000 for example can be traded in EUR/USD currency pair with only $250 in trading account margin.

In this particular example, $250 in your forex trading account can control a trade of $100,000 using 400:1 leverage. In other words, for every $1, you as a forex trader are in fact controlling a whopping $400.

The fact that a small amount of money can control a large amount of money in forex trading can certainly serve to magnify potential profits. But on the flip side of the coin, the amount of risk involved in using this high level of leverage is also equally magnified.

High leverage trading is aggressive trading that is both characterized by high risk and high reward potential. Therefore, it is advisable to use caution when trading with the substantial leverage common in forex trading.

Why too much leverage is dangerous? Even a small movement in the market can be magnified many times by using leverage making large profits for you when the market moves in your favor. However, when the market moves even a small amount against your position, your whole trading account can get wiped out. This is the dark side of using too high a leverage.

What is the safe level of leverage that you can use in your trading? In the beginning, don’t use more than 5:1 leverage in your trading. With experience, you can increase that level to 10:1 or 20:1 but this much leverage would always be sufficient for you.

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