As of 2010, daily turnover in the forex market was nearly USD 3.98 trillion and of this, $1.5 trillion were spot transactions. Think where these figures stand today. Just as large investments can reap large profits, you may also incur a same amount of loss. The market is volatile and starting small is often a good option. This article on forex leverage explained may give you a good idea. Read on.
What is forex leverage?
Now that you understand the scope of making a profit in this market, the very next question is where to get the initial investment? You do not need $100,000 to start trading. You can make a $100,000 trade with just $1,000. Yes, you read it right. With forex leverage, this is possible.
“Leverage” in other words means borrowed money. This does not mean that you take a loan of $100,000 from your broker. No broker will lend you money to trade in a forex market. This concept means that for every dollar you put into your forex account, you can invest an equivalent amount in trading. Did your query of “forex leverage explained” just become complicated? Consider an example.
Say you put $1,000 (USD) in your account. Your broker will then allow you to trade for $100,000. That is, for every dollar, you put in, you can trade with an amount of $100. This is known as 100:1 leverage or 1% margin. Similarly there are 50:1, 40:1, 30:1, 20:1 and 10:1 leverages available.
How are you making a profit then?
Just because you are trading with $100,000 does not mean that your profit will be $50,000. Remember, you invested $1,000, and your profit will also be in the same range. But when seen in terms of percentage, it’s huge. Again, since this article is about forex leverage explained, let’s take an example.
You are bit ambitious, and you went for 20:1 leverage. Say you invested $5,000 in your account and, therefore, your broker allowed you to make a trade of $100,000. You decided to buy European currency currently rated at EUR/USD = 1.36. Also, you put a stop loss at 50 pips, that is, you restrict your loss at a maximum of USD 500.
Now, you got lucky, and Euro gained 200 pips against USD, or the rate became EUR/USD = 1.36. Hence, you make a profit of 200 pips or USD 2,000. In other words, you invested USD 5,000 and gained USD 2,000, which is 40% profit.
Convinced? Now with USD 7,000 in your account, you can now trade with $140,000 and with 40% profit again, the amount in your account will stand at USD 9,800. You capital almost doubled in a matter or few days. Did you actually trade with $100,000? But you made a huge profit.
Hope your query of “forex leverage explained” has been addressed. With the leverage concept, almost anyone can now start forex trading with almost any amount. A higher leverage ratio, like 10:1, will reap more profits in a short span of time. Returns are more than investing in gold or real estate. Start investing now.