Leverage
Leverage is the ratio of investment to actual value. Some common leverage ratios are 1:20, 1:40, 1:50, 1:100. The leverage of 1:100 means a trader can buy a Forex contract of $1000 by paying $10.
Let's understand leverage with the help of an example given below:
If you bought 1 lot of USD/JPY at 121.22 and sold at 121.26.
Without leverage you gain 4 pips. = (0.04/121.22)x100% = 0.033%
With 1:100 leverage you gain 4 pips = 0.033% x 100 = 3.3%
This was the case of profit. You can even incur loss the same way. Leverage is not a way to minimize your losses. So, when you want to open your online forex account, you may want to ask your broker as to how much leverage he'll be providing. The leverage, like lot size, depends upon the type of forex account you open.
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