If a Forex broker offered a leverage of 200:1, it would only take a deposit of $100 to control a $20,000 trade. Likewise if a broker offered a leverage of 400:1, the same $100 deposit could control a $40,000 trade. Forex leverage - more opportunity, more risk.

Using Too Much Forex Leverage:

Leverage can be very dangerous if used improperly. A common mistake that currency traders make is using too much leverage for their account size. It is tempting to use 400:1 leverage when you have a small account balance because it lets you put on big trades. However, if the market moves against your position by even a small number of pips, it can result in large losses to your account.

For example, you open an account with a $500 initial deposit. 400:1 leverage would allow you to make a trade of $200,000 with an average pip value of $20 per pip. If the market moves against you just 25 pips, your entire account would be wiped out. Some currency pairs can move 25 pips or more in a matter of minutes.

Why Do Forex Brokers Allow Such High Leverage?

Forex brokers make their money on the spread which is the difference between the bid and ask prices. The bigger the trade, the more the pips in the spread are worth. For example, an initial deposit of $500 with 50:1 leverage would allow a trade of $25,000 and a pip value of $2.50. On a 3 pip spread the broker would make $7.50 on this trade. A leverage of 400:1 on a $500 initial deposit would allow a trade of $200,000 with a pip value of $20. The forex broker would now earn $60 on a 3 pip spread.

The broker gets paid whether your trade is a winner or a loser. Offering high leverage allows brokers to make the most money from your trading and at the same time make it possible for you to trade by letting you open an account with a small initial deposit.

Proper Use of Forex Leverage:

When used properly, leverage can be used in ways to give you an advantage in your trading. A good example of this is adding to your position during a winning trade. If a trade turns profitable you can add to your position to compound your gains and leverage your profits. Forex leverage can work for you, or against you. Just because a broker offers high leverages of 200:1 or 400:1 doesn't mean that you should use it all the time. Never risk more than you can realistically afford to lose.

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