What does leverage mean in forex trading?
Leverage or gearing refers to how much capital (performance bond) the trader must put up to hold a contract (buy / sell position). The higher the available leverage, the smaller amount of up？front capital required to control the asset.Take a house for example. Say the house costs $200,000. If you had all $200,000 liquid cash available, you could buy the house outright. This would be 1:1 leverage. $200,000 cost and $200,000 put down to pay for the cost.200,000 / 200,000=1/1 or 1:1 leverage.But let's say you do not h ave or do not wish to tie up $200k in the house. So you talk to a bank and they offer you amortgageloan with $20,000 down payment. The total cost is $200,000 but you only have to put up $20,000 to "control" the house. 20,000 / 200,000=1 / 10 or 1:10 leverage.A similar concept holds in forex. to buy a standard lot contract of USDJPY ($100,000) would normally cost $100,000 for you to hold with 1:1 leverage. With 1:10 leverage, the trader would have to put up $10,000 to hold the $100k position. with 1:100 leverage, $1,000 is required per $100k.Leverage gives the asset holder more buying power. It gives you the ability to manage assets that are valued much higher than the up？front capital required to purchase the asset outright.
Related Q&A：
Well, let me explain this to you. The concept of operating leverage involves the use of fixed costs to magnify returns at high levels of operation. You see, when a company has a significant amount of fixed costs, like expensive equipment or long？term leases, as the level of output and sales increases, the proportion of those fixed costs to each unit of output decreases. This means that the profit per unit can increase significantly, leading to a magnified return. But it's important to note that it also comes with higher risks during downturns. So, companies need to manage this carefully to take advantage of the potential upside while minimizing the downside risks. Oh, and that's the basic idea of operating leverage!
