Leverage stands out as one of the most important factors that are separating stock trading and futures from forex trading. In most situations an investor will decide the leverage that they want and it can go as high as four hundred to 1. Investors will use leverage in order to increase returns on investment.
What is Forex Leverage?
In order to start trading forex investors have to open margin accounts with brokers. For this purpose traders can take loans from brokers. The loan is forex leverage. When doing forex leverage trading (also referred to as trading on margin), an investor does not have to put a full value in the position that he/she wishes to open. In most cases we are going to notice a leverage of 50 to 1, 100 to 1 or 200 to 1. The broker dictates the leverage and an important factor taken into account is the amount that is traded. In order to trade from a standard position, 100 thousand currency units will be traded with a leverage that is usually 50 to 1 or 100 to 1. In a lesser position, like that obtained for 50,000 dollars, the leverage given would be of 200 to 1.
You will see that there is more leverage in forex trading when compared to futures and stocks. It can even go up to 100 times the value of the account. Always keep in mind that increased leverage also means high risk.
In most cases forex brokers over a leverage of 99 percent of the trader’s position value. A trader needs to offer only 1%. This basically means that investors will need to deposit $1,000 if they want to trade an amount of $100,000. In such a trade we see a leverage of 100 to 1. The forex broker is not going to charge any interest on this loan. A stock broker would.
Forex traders will use leverage in order to gain profits from fluctuations in exchange rates between 2 countries. There is a lot of risk noticed in 100 to 1 but it is actually less than people believe. This is because during a regular interday trading session currency will fluctuate less than 1 percent in most cases.
Online brokers usually capitalize on the use of really high leverage. High leverage means that investor has to use less money. As an example, if you trade with 400 to 1 you just need to use $250 as an account contribution. In the event that the currency that you trade goes down then you can lose a lot of money. It is highly important that you constantly monitor the account and always use limit and stop orders.