Even though leverage is one of the most well-explained topics in Forex trading courses and online learning resources, many traders (even experienced ones!) fail to fully comprehend it, likely due to some preconceptions.
There is only one thing leverage really affects in your trading: the amount of margin required to set aside to open a position.
It doesn't make you open bigger trades or risk more, or earn more.
Leverage is normally not even involved in the position size calculation process when a trader uses fixed percentage risk.
Your leverage only restricts the maximum size of the trade (or number of smaller trades) you can open given your balance and the contract cost of the currency pairs you are trading.
For example, this is completely wrong:
Let’s say you are using 1:100 leverage and you risk 1 percent of the account balance on each trade. That would basically mean you are using 100 percent risk.
No, that means that you are still risking 1 percent of your account per trade. Possessing 1:100 leverage at your disposal means that you need 100 times less margin to open the trade than you'd need if you traded without leverage.
The point of the leverage is to reduce the amount of margin you need to open a trade. With 1:100 leverage you will have no problem opening a trade with 5 pips stop-loss (SL) and 1% risk on EUR/USD. With 1:10 leverage, it would be impossible regardless of how large your account is.
In other words, a higher leverage lets you risk a higher percentage of your account with a smaller SL.
If you usually trade with large stop-losses (e.g., hundreds of pips) and rarely risk more than 1% of your account, then you would do well even with 1:10 leverage.
However, if your stop-loss is normally very small - like 5 or 10 pips, then you need a high leverage to be able to risk 1% on such a small SL.
