Do you have an idea about what is leverage? Here, we are trying to explain leverage. It is basically defined as exchanging a certain amount of money, which is needed while doing an investment. As far as Forex is concerned, that amount of money is generally exchanged from a broker. Forex trading offers high leverage for a preliminary margin requirement. In order to calculate margin-based leverage, you need to divide the total value of transaction by the total margin amount you need to put. One of the main reasons why large numbers of people are attracted to Forex trading rather than other financial instruments is that with Forex trading an individual has high chances of attaining a high leverage than they would have in stocks.
In Forex, most of the investors use leverage to attain profit from the fluctuations in the rate of exchange between two different currencies. The leverage that is attainable in the Forex trading market is regarded as the highest one that an investor can attain. Leverage is also defined as a loan that is offered by a broker who handles their own Forex account. When an investor takes a decision to make in investment in the Forex market, the first and the foremost important thing they should do is to open a margin account with a broker.
Generally, the amount of trading leverage offered is either 500:1, 100:1 and 200:1 based on broker and size of the position where the investor is continuing trading. Standard trading usually done on 100,000 currency units, so for doing a trade of this particular size, the leverage offered is generally 50:1 or 100:1. Most of the times, leverage of 200:1 is used for positions like 50,000 dollar or less than that.
Risks Associated With Excessive Leverage
Real leverage has the ability to maximize gains or losses with the same magnitude. More amount of leverage you apply on your capital, higher will be the risks. You should keep in mind that it is not necessary that this risk is always related with the margin-based leverage even though it can have influences on a trader if he or she is not very careful.
Benefits of Leverage
Considering the fact that you can do trading up to 200 times of your money, one of the major benefits of Leverage is that you can make huge gains even if you do not have a large amount of money. For instance, with a maximum 400:1 leverage and 0.25% movement in your way, you can simply double the amount in your account. Therefore, when a person is correct about a trade, leverage will really help them achieve huge benefits. The best and in fact the unique thing about Forex market is that no other trading market in this world provides so much amount of leverage. This is the main reason why Forex is attracting so many traders.
With a small amount of leverage applied on every trade, you can afford to offer your trade a bit more space by setting a wide stop and also avoid risks associated with the market changes. A trade with high leverage can at fast rate deplete one’s trading account if it goes against them, as they will have to suffer huge losses because of huge lot sizes. Always keep in mind that leverage is entirely flexible and can be customized according to the specific needs of a trader. Having an objective of trading profitably is not related to the act of making millions by the end of the month or year.