Forex Trading: How to Capitalize on Leverage

One of the major factors that separate forex trading from futures or stock trading is leverage. Forex trading leverage can go as high as 400:1. In most cases, investors get to decide the amount of leverage they want to trade with. They use leverage with the purpose of increasing the returns on investment.

What is Forex Leverage?

To invest in forex trading, a trade must start with the opening of a margin account with a broker. For this, the trader can take a loan from the broker. This loan is the forex leverage. In forex leverage trading (also called trading on margin), investors need not put up the full value of the position they want to open. Typically, the amount of forex leverage given is either 50:1, 100:1 or 200:1. This leverage depends on the broker and how much the investor is trading for, i.e., the size of the position. To trade from the standard position, 100,000 units of currency are traded, for which the leverage provided is either 50:1 or 100:1. For lesser positions, such as for $50,000, the leverage used would be 200:1.

More leverage is offered in forex trading than in stocks and futures, and can go up to 100 times your account’s value. Remember, increased leverage is associated with higher risk.

How Can One Capitalize on Leverage?

Typically, forex brokers provide a leverage of 99% of the value of a trader’s position. The trader is required to come up with only 1% (the remaining value). So, an investor will deposit only $1,000 in his margin account when he wants to trade $100,000 at a 1% margin. The leverage provided on such a trade in 100:1. Also, a forex trading broker does not charge interest on this loan, unlike stock brokers.

In the forex market, traders use leverage to yield profit from exchange rate fluctuations between two countries. Although the risk involved in 100:1 may seem enormous, it is considerably less, given that during interday trading, currency prices typically fluctuate by less than 1%.

Many online brokers capitalize on super high leverage. The higher the leverage, the lesser the money an investor has to put aside per trade. For instance, if a trader is trading with 400:1, he will only have to contribute $250 to his account.

Investors must remember that the higher leverage also brings higher risk. If the base currency in which your trade takes a downturn, you may suffer a substantial loss. It is crucial to monitor one’s account regularly and use stop and limit orders.