Adding Leverage To Your Forex Trading

It is very common in foreign exchange markets to find a leverage of 100:1 or more. On the other hand, that does not mean that you have to use all the leverage available just because the broker has offered you leverage as high as 100:1.

Actually, if you are familiar with trading, you will only use high leverage when you can manage and calculate the risk related with the high leverage to your benefit.

Basic Margin and Leverage

Using borrowed money from a broker to buy foreign exchange or securities is recognized as “Buying on Margin.”

A trader will usually put a specific amount of money in his trading account and then the broker will use that money as a deposit to allow the trader to purchase securities or foreign exchange agreements valued at a multiple compared to the deposited amount.

Traders use leverage to buy or sell securities or contract using other people’s money. So if a broker proposes a 20:1 leverage, that means he is allowing the trader to borrow 20 times the amount of deposit in the account to trade.

Let’s say the broker is offering 20:1 leverage and the contract costs $10,000, a trader will only need $500 in his trading account to buy the contract worth $10,000.

So if the value of the contract goes to $11,000, the trader will earn a profit of a $1,000. This would signify a return of 10% of the agreed buying price, but a 200% return of investment.

Forex is the biggest and most liquid marketplace in the world, making it easier to get in and out of a position, which is why the extreme amounts of leverage that are common in the forex markets happen.

This allows the trader to control with a definite certainty on how much he is willing to lose on a trade. Forex brokers allow their traders to benefit from high leverage because it is possible to exit a position quickly.

Forex, Stocks and Future Markets

Leverage in the foreign exchange markets is much bigger than in most other markets. Let’s say if you trade equities, you will be able to borrow twice the amount of money you have in your account.

Now in the case of Future Market, you might be able to borrow 20 times the total of funds you have in your trading account.

In Forex markets, since the leverage is so big, the broker will need you to sign a contract stating how a declining position will be dealt with.

There is usually a device in the agreement that will permit the broker to automatically liquidate a trader’s position if it drops down to 75% of the margin or deposit, because a highly leveraged account positions greater risks for the broker and the trader.

To protect the broker, and to guarantee that the trader does not have to put extra funds to the trading account, at a specific point or period, the declining position will be automatically closed if the losses on that position threaten to be more than the amount of money available in the trading account.

In order to be aware of how a losing leveraged position will be dealt with, the traders should read the agreements they have with their brokers very carefully.

Trading in the foreign exchange markets proposed several possible profitable breaks. Using leverage can expand these chances to a very large degree.

Using leverage involves a broad understanding of risk management and the use of appropriately distinct stop-loss order in the market.

The traders should also be well disciplined in order to follow the guidelines needed for taking advantage of leveraged markets. The leveraged positions can be a trader’s best friend or his worst nightmare. It all depends on the trading habits and mindset. Good traders are disciplined and follow their risk management policy.

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