Understanding Leverage and Its Levels | BR Trading
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Understanding Leverage and Its Levels

In the previous lesson, we noticed that Forex trading volumes are relatively large, and price movements often occur within narrow ranges. This might lead one to think that large investments are required to make reasonable profits, which could make it hard for small investors to enter the market.

But that assumption applies more to markets like stocks or real estate.

In Forex, the situation is quite different because brokerage firms offer what's known as leverage—a form of credit or financial facility that allows traders to operate with much larger positions than their actual capital allows.

Simple Analogy: Buying Land with Bank Financing

Imagine you want to buy a plot of land worth 300,000 SAR and go to the bank for financing. The bank might ask you for a 10% down payment, which is 30,000 SAR, and will finance the rest.

This means the bank is giving you a leverage of 10:1, as your investment is one-tenth of the total value.

If land prices rise over time and you sell the land for 400,000 SAR, your profit would be 100,000 SAR, from an original investment of just 30,000 SAR.

Leverage in Forex Works Similarly—but Bigger

Brokerage firms offer much higher leverage, commonly up to 100:1 or even more.

  • A 100:1 leverage means that for every $1 you invest, you can control $100 in the market.

  • So if you invest $1,000 with 100:1 leverage, your buying power becomes $100,000.

⚠️ Important Warning

While leverage can magnify profits, it can also magnify losses.
A sudden market move against your position may result in significant losses, possibly wiping out a large portion of your original capital.

Because of these risks, regulatory authorities have started placing pressure on brokers to reduce available leverage, implementing rules aimed at protecting traders.

📘 Stay tuned for the next lesson to learn more about the Forex market.