World Business Web

The concept of leverage is one of the most important concepts in forex trading. Understanding leverage is your means of maximizing profits while managing risk. Leverage is the mechanism that can make or break you.

What is leverage? In the context of forex trading it is a form of loan or credit extended by the broker to the investor. In forex, the leverage or lines of credit available to the investor is the highest available in the investment world.

When an investor decides to enter the forex market they are given a margin account with their forex broker. The amount of leverage provided can be either 50 times, 100 times, or 200 times the initial investment depending on the size of the trade. High amounts of leverage are a necessary risk the broker must extend to the investor because the price deviations are extremely small. We will cover this in greater detail shortly.

For trades of 100,000 units or more leverage of 50:1 to 100:1 may be provided by the broker. For smaller trades, up to 200:1 may be offered. If you have little to invest then clearly you need to seek a broker that can offer you high leverage. However, remember, leverage is a double edged sword. High leverage means you can win big but you can also lose big as well.

If an investor wishes to trade $100,000 in currency they may only need $1000 in their account if the leverage offered by the broker is 100:1 or $2000 if the leverage provided is only 50:1. This is significantly greater than the 2:1 leverage offered on equities or the 15:1 provided by the futures market.

Although leverage of 100:1 and 200:1 may seem like a very risky loan on the part of the broker it is actually manageable due to the fact that most currencies only change by 1% or less during most intra-day trading. This means a $1000 dollar deposit can cover a 1% loss on $100,000 investment. If the fluctuations were greater than 1% then clearly the leverage would need to be adjusted to reflect this.

A fluctuation rate of 5% daily would mean the amount of leverage provided could not exceed twenty times the original investment, a fluctuation rate of 10% would mean the leverage provided could not exceed 10:1 and so on. You get the idea.

The huge amount of leverage offered by forex brokers is to allow an investor to realize significant gains on relatively small investments that do not grow or shrink very rapidly.

There is a notable exception to this rule and one which has important implications in terms of appropriate levels of leverage. While fluctuations in major world currency pairs such as the US dollar and the Japanese yen are normally less than one percent, much greater variation is possible in other exotic currency pairs like between the Australian dollar and the Swiss franc. This volatility exists because there is much less volume in trade. Larger fluctuations mean you need to manage your risk by using less leverage.

I recently saw an introduction to the Forex market and now see what are the advantages of investing in Forex market and more about its features and benefits and above all we buy it with other investment alternatives.

Availability

The Forex market is available 24 hours a day, five days a week.

Accessibility

The Forex market is accessible to anyone located anywhere in the world, which can operate on it from the comfort of your home with just having an Internet connection.

Opportunity

Forex investment opportunities presented at any time, no need to wait for a bull market to win, and that any time a currency will appreciate against another.

Minimum amount

To start investing in Forex, it requires a large amount of money.

Liquidity

Forex is the most liquid market in the world, allows the investor to withdraw their money at any time, there will always be someone willing to buy and sell currencies.

Transparency

Because the number of operations performed in Forex, it is virtually impossible to manipulate the market.

High profitability

In Forex it is possible to make big money in short time, but with a high risk, especially if you do not have adequate preparation.

Leverage

Usually the broker offers high leverage, i.e., they provide opportunities that one can operate with a much greater amount invested.

Finally, we should also mention the disadvantages of investing in Forex, among the top are the high risk involved (since it is a highly speculative and volatile market), the need for knowledge and experience that allow one to invest properly and minimize risk (which can take time to acquire), and the choice of a broker or intermediary company inexperienced or unscrupulous (which many of them are not regulated).