It is powerful and very useful in Forex Trading. With 100:1 leverage, you are effectively using $1 to hold $100. Leverage of 500:1 will allow you to hold $500 using $1. This is not new to the financial industry, but is widely used in currency trading to use the unit dollar value of a currency.
He works with the capital that funded the trade. Capital must be in currency or cash in order to receive leverage. It is similar to a derivative or contract for difference in the price of shares and shares. Using cash as leverage is much more efficient than using physical assets as they are more difficult to dilute and cash out. Thus, leverage is still used in FX trading with capital at 100:1 leverage. This determined the size of 1 lot per 100,000 contract in Forex trading. (For mini lot 0.1 lot 100k contract).
1 lot actually contains currency in the amount of 100,000 contracts. This is equivalent to $1,000 of capital used to hold $100,000 worth of contract currency. Since a pip is used to move currency, 100,000 for moving 1 pip would be $10 per pip. (10,000 pips is actually $1, but with leverage, that’s a $100,000 contract.)
For a trading account that has 200:1 or 500:1 leverage, this is different from currency trading leverage. Please don’t confuse both. FX leverage is fixed at 100:1 for FX trading 100,000 contracts. A mini-lot is filled with 0.1 lots or 0.01 lots. For a trading account leverage that is 200:1 or 500:1, this will determine your margin needed to execute a 1 lot out of 100,000 contract. Using 100:1 is $1,000. Using 200:1 costs $500 per lot. Using 500:1 costs $200 per lot. This is of course with higher leverage, you can actually buy more lots. With a trading account with 500:1 leverage, you can buy 5 lots for a total of 1k equity.
No doubt this allows you to buy more lots with higher leverage, but the size of the down is a drawdown and the pip loss is still in line with your 100,000 cut trading lot. Thus, most money management programs use a mini-lot of 0.1 or 0.01 lots for trading. ($1 and $0.1 per pip, respectively). So don’t confuse the two. One is the 100,000 contract leverage for buying and selling currency, which is fixed at 100:1. The other is your trading account leverage, which is provided by your forex broker.
I end this topic with a comparison of trading stocks and stocks. Without it, you buy 1 share at the price of 1 share. Using this, you can buy 100 times more with the same capital. (Assume that the price of a share is the same as the price of a currency, and 1,000 shares are equivalent to $1 per share.) With 1,000 equity, you can buy 1,000 shares or buy 1 lot of a contract for 100,000 contracts in foreign exchange trading.