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Forex Market: Leverage

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Like CFDs (Contract for Difference) traders, Forex has a powerful tool that traders can use to improve their trading portfolio. Traders use this tool in Forex trading to earn a profit, and experienced forex traders use this well because they understand how it works. So, how can you be like the professional forex traders? Understanding leverage is essential in trading in general, not just Forex. This article will discuss Leverage, but before we do, let’s have an overview.

What is Forex?

What is Forex? It’s a fast-growing and wildly attractive market for trading currencies and options. In just a few short years, it has grown to become one of the most popular ways for individuals to purchase and sell currency on a global scale. Whether you’re a seasoned trader or a beginner hoping to join this burgeoning business, there are a few things you should know if you want to be a part of one of the world’s fastest-growing industries. Keep in mind that, unlike stocks and investments, Forex is solely to exchange currencies.

Example:

A forex trader may want to buy and sell USD/EUR or EUR/USD. In a nutshell, you’re trading these currencies at it each other, and you’re going to speculate if you’re going to profit or not.

The Forex Market

For a long time, the Forex market has been one of the largest and most liquid in the world. It is a sophisticated, competitive market that offers a diverse range of products and services customized to the needs of its customers. Furthermore, because there is such a high volume of trading daily, any market disruption can substantially impact a trader’s profits. Pay attention to what’s going on around you and how prices are moving the next time you’re standing at the trading platform waiting to make your trades. You can wind up using a plan that allows you to make a lot of money in a short amount of time.

The global forex market is worth an estimated $6 trillion, making it one of the most important markets in the world. This fast-paced industry is highly regulated, with several young, talented traders entering the scene each day. Trading involves lots of statistical analysis and careful research, making it all the more enjoyable for investors and traders alike.

Leverage 

What is Leverage? You can use Leverage to increase your profits on the Forex market by borrowing money at lower interest rates than you would pay if you used your money for investment purposes. You can usually find a source of cheap credit in a marketplace where borrowers and lenders meet in person. You may have heard that Leverage isn’t a good thing because it can lead to people taking advantage of people. However, if you’re using Leverage correctly and following your goals, it has many benefits.

In forex trading, Leverage can also increase your position size, or the number of shares you own, by selling a commodity (often called ‘asset’). You do this by buying (buying calls) or selling (selling puts) the underlying asset you are attempting to buy/sell. Losing money on a trade is always possible; however, it can also be avoided if you know how to gain Leverage and remove it when needed.

Take note that Leverage is also a double-edged sword. It indeed has its advantages like what I discussed above, but it can mean many painful losses without the proper knowledge of using it properly.

Margin/Leverage Ratio

 You can’t have leverage without margin. The lower the margin requirement, the greater leverage can be used for each trade. Here are some examples:

 

Margin Req. Leverage Ratio

2%        50:1

1%       100:1

.5%      200:1

The Risks of Leverage

 Forex leverage is used in the financial industry to refer to the practice of placing orders on futures contracts in the hopes of causing a decrease in the price of a futures contract before it reaches a predetermined level. This tactic is widely used by traders in both the U.S. and Europe. It involves placing a stop-loss order at a price that the exchange or brokerage deems to be profitable for holders of the underlying instrument(s) to sell (generally at either the upper end of the limit up or lower end of the limit down range).

The stop loss allows the trader to profit from selling a commodity in limited supply (as determined by market makers). Similarly, it helps limit losses suffered by buyers who attempt to enter markets when there is little available supply or demand (as determined by cut-outs or other factors)—doing this lessens a trader’s losses.

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