Forex is currently the largest investment market in the globe. It accounts for $ 5 trillion worth of trades per day and remains open for 5 and half days a week. In this highly volatile and fluctuating arena, making return son investments requires the implication of certain techniques and strategies. This is where the concept of CFD trading leverage comes into play. So, before one steps into the currency market, it is important to get along with the term and its associated intricacies.
What is leverage in Forex and CFD?
The primary concept of leverage in stock markets for instance resorts to multiplying a specific investment value and it is no different with contracts in Forex. When dealing in contracts, brokers ask dealers to make predictions on the pen and close prices of a currency pair and profit or loss is dependent on the same.
In Forex, leveraging a currency pair invariably escalates the total investment volume for a trader. Suppose an investor is looking to trade in USD/JPY using a volume of $1,000. However, market trends claim that this price will witness a bullish climb soon. So, the broker asks his trader to leverage the position in the ratio of 50:1 (say).
As a result, his total trading volume amounts to 1,000 x 50 = $50,000. Therefore, a larger opening will now provide him with much larger returns.
When to opt for CFD trading leverage?
Since, CFD associate themselves with the predictions of floor and ceiling values of currency pairs, therefore, while leveraging a contract in Forex, one needs to keep in mind the following conditions.
The duration for which an investor is signing a contract.
Volume of risk and investment.
When price action predicts a bullish market trend.
On accounts of a hefty welcome bonus.
Let’s expand each of these situations now.
- Contract durations
Every contract for difference or CFD in Forex lasts for a particular time before attaining maturity. Contract durations are important to consider since most contracts often extend on to session overlapping instances.
Experts recommend opting for a CFD trading leverage during session overlapping (if possible), as the market is most volatile during these instances.
- Volume of investment
Often investors make the mistake of risking their entire profit margin in an expectation to earn greater returns. However, an unprecedented trend reversal often sees these investment accounts go broke. So, by thumb’s rule, one should investment a maximum 20% of his profit keeping the rest as back up.
- Bullish & Bearish markets
A market is bullish when it sees a price surge and is bearish when it witnesses a price drop. One must take into consideration charts and indicators and combine them with historical data to evaluate any upcoming bulls.
P.S. – These are prefect investment periods.
- Welcome Bonus
This refers to the bonus amount which one receives on opening a margin account with a broker. Welcome bonuses act as leverages and help investors escalate their trading paradigms manifold.
So, if you want to exploit a CFD trading leverage to its fullest, then you need to consider the above points to ensure profitable returns. However, try out your calculations on a demo account first.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.