One of the main reasons many people are attracted to forex trading is the strategy of leverage which allows traders to enter a transaction using borrowed capital. It is almost similar to obtaining a bank overdraft for personal or business requirements. Leverage is a powerful tool in forex trading. It gives retail traders flexibility and purchasing power to take up positions that they would not have even dreamt of. You are virtually living on borrowed funds provided by a forex broker who dangles the carrot by offering high leverage more than you would get in the stock market.
To find reliable forex brokers online, you can visit the websites of brokerage firms or reputed financial newspapers. Accessibility to global brokers and the proliferation of trading systems have promoted forex trading in the form of leverage accounts. Although leverage offers a high degree of reward and risk, it allows the trader to take on more positions than they could have with their capital alone.
With a small amount of initial capital, you can become a significant player in the forex market even if you don’t have cash in hand. That is the beauty of leverage in forex, where the sky is the limit in the currency market where over $5 trillion worth of transactions takes place in a single day. However, traders should be mindful that leverage is like a double-edged sword where it can magnify your profits while simultaneously amplifying your losses depending on the trade. There are risks associated with forex trading, but many indulge in leverage because the higher the risk, the greater the reward.
You must understand what leverage is before you execute this strategy as a forex trader. Brokerage accounts allow leverage through margin trading, where the forex brokers shore up the borrowed capital. Thereby forex traders profit from relatively small price changes in currency pairs. Forex brokers offer high leverage so that retailers can build upon an initial margin requirement to control a vast amount of funds.
High leverage forex brokers allow traders to open prominent positions with a small balance. These forex brokers will allow you to open multiple small trades concurrently, effect stop-loss orders to mitigate losses and copy trades, or follow a strategy’s signals that require high leverage.
In forex trading, currency movements are measured in pips or fractions of a cent. It is why currency transactions must be carried out in sizable amounts, allowing these minute price movements to be translated into larger profits when magnified through leverage. However, when you deal with an amount such as $100,000, small changes in the currency’s price can result in significant profits or losses.
Leverage levels are usually expressed as a ratio, meaning the trader should have at least a particular percentage of the total available volume for trading. To calculate leverage, you can divide the total face value of your open positions with your trading capital. In the forex market, leverage is usually as high as 100:1. That means, for example, for every $1,000 in your account, you can trade up to $100,000 in value. Forex brokers are willing to offer a high ratio for traders because leverage is a business gambit. Brokerage companies know that the risk factor can also be contained if the account is properly managed. The other reason is brokers want to cash in on the high liquid forex market where it is easy to enter or exit a trade at the desired levels than in other financial markets.
Respected regulatory authorities have lowered the maximum leverage for regulated trading. The leverage allowed by US-regulated forex brokers is 1:40. European brokers are allowed to use only 1:30, while Australia also lowered leverage to 1:30 recently. Most brokerage companies use low leverage ratios due to regulations and risks. To access high leverage offering traders, you can either choose a forex broker from Switzerland or New Zealand, become a professional trader, or trade with a regulated reputable broker. Unregulated brokers may offer great leverage of 1:1000 or something similar, but then you have to brace for any eventuality or risk associated with such unusually high leverage.
It would be best if you were wary of excessive leverage, although it has the potential to enlarge your profits or losses in greater magnitude. The higher the leverage, the greater the risk you will have to bear. At excessively high levels, leverage has another effect. In addition to simply magnifying profit and loss, it begins to damage your chances of success on any particular trade materially. Excessively high leverage may also distort the probability of your trade being successful because of transaction costs or its lack. Transaction costs could change this picture, presenting a hurdle between you and profitability.