You are thinking of investing in forex I presume. And, probably, the word “leverage” had a lot to do with it. It might sound to you like the whispers of a femme fatale. But you do not know much about, do you? So, the question is in forex trading what is leverage? Here’s the answer.
Everyone likes this word irrespective of the situation. Everyone wants some leverage to help them through whatever the world might throw at them. For you, leverage is just as important and even more so in case of FX.
What is forex trading leverage? It is simply that leverage which you get on your investment for trading with a larger amount in this forex market based on a specific ratio. Let’s say for conversations’ sake that you have a 50:1 leverage for your account where you have $1000. This practically means you can trade with an amount of $50,000 in the market.
This ratio of leverage can change and does change quite often. These variations of leverage depend on: -
The type of account you might have.
The broker or the brokerage firm you are an attaché to.
The currency pair you are trading with.
Size and liquidity of the average spreads of the market.
FX leverage can vary from 25:1 till even a 500:1 ratio depending on all these multiple factors culminating as one.
So in forex trading what is leverage?
Quite simply, leverage is why you can trade in forex. With a 400:1 leverage, you can trade for a $400,000 with a $1,000 and if you do get a 2% increase in your asset, it means you have a straightforward profit of $8000. Compare that to the amount of cash invested, and you will suddenly realize you have an 800% profit on the cards.
This is what leverage is and how important it is to you. It is quite obvious that if not for leverage, many individuals would not have invested in forex. And although, more than 48% of the forex market is dependent on the major worldwide banks, the rest is made up by investors other than banks. One of them might just be you.
Given that the forex market has a daily turnover exceeding $3 trillion, at least $1 trillion is traded with the finances of individual investors. At least $1 trillion!
What is the use of leverage in forex?
Leverage in FX is not only your benefit, it is a blessing for the brokerage firms from multiple contexts. Brokers in forex earn from the spreads they allot to a sale along with the interest rates and fees they apply for their services. Also, leverage allows increased cash flow and transactions in the market thus increasing market liquidity and subsequently, investment into it.
To cap it all up, if you are waiting for the opportune moment to plunge into forex, you simply shouldn’t. For until you take that leap of faith, you’d be denying yourself the chance to make a moment of your own. So, if you’re asked again -in forex trading what is leverage?, just answer; it’s the chance which you were waiting for.