All About Forex Trading Leverage

When searching for advantages of forex currency trading over other forms of financial instruments trading, one point you always get is the 'high leverage'. Forex trading involves very high leverage compared to stock, commodity and futures trades. This article is a detailed account of that.

What is Leverage?

Leverage is a very common trading practice of borrowing money from others to invest in a financial instrument. Generally, the money is borrowed from the broker you are trading with. The broker may charge interest on this leveraged money for overnight open positions. The amount of money you can borrow differs with brokers, product(s) you are trading and the type of your trading account.

Why Forex Traders need Leverage?

In currency trading we try to profit from very small changes in currency pairs known as pips. One pip is the smallest change in currency value and is the change in value of second or fourth decimal value of a pair. When trading with the dollar (eg: GBP/USD) a 100 pip move from 1.9000 to 1.9100 means one cent increase in exchange rate. So in that case for getting a $100 profit requires investing $10,000. And in reality you are trading for much less pip differences so you need very high trading investments for any reasonable profit. That is why there is high leverage in forex trading. A 1:100 leverage ratio means that you can trade $100,000 worth currency pairs by investing just $1000.

Margin Based Leverage Vs Real Leverage

Most brokers offer you leverage based on the margin you have. Margin is the minimum money you need to put up in your trading account for doing a transaction of a specific value. The general 1% (100:1) margin requirement of forex accounts means that you have to maintain at least $1000 in your account for trading standard $100,000 worth contracts. This margin-based leverage can be any where from 400:1 to 50:1. This differs from real leverage, and in fact it is actually defined as the maximum leverage a trader can enjoy in his trading account.

Real trading leverage is the ratio between the actual trading capital in your account and actual money you burrowed for all your current open positions. For example if you are trading $100,000 worth contract(s) and you have $20,000 in your trading account, then the leverage is 5:1. So this is very different from the margin-based calculation and is the factor to be considered when doing transactions. The optimum leverage for a trade depends on many factors like the liquidity of currency pair, trading style, brokerage features, trading experience and trader money management.

Advantages & Disadvantages of Forex Leverage

Many regard leverage as a 'double edged sward'. It can magnify both your profit and loss and the magnitude of both depends on how much leverage you taken. For example if two traders - trader A and B - trade with $20,000 accounts and opted for 50:1 and 5:1 leverages respectively; then they can trade $1000,000 and $100,000 worth contracts. If there is 100 pip profit, then trader A can benefit by $10,000 which is 50% increase to his investment and trader B can benefit only by $1000 a 5% increase to his investment. But in a reverse 100 pip loss scenario, trader A can loss $10,000 which is 50% loss to his investment and trader B can loss $1000 which is 5% loss of his investment. When trading on higher leverage there are also chances of margin calls. So a successful forex trader should know the this calculations and the way to utilizing it correctly.

About the Author

This article is written for Orient Finance Brokers, a leading middle-east online forex trading broker. With an award-winning platform and tight currency spreads, OFB allows you to trade currency pairs with confidence. The online financial market trading blog by OFB is a very good source of trading information.

More Resources

Unable to open RSS Feed $XMLfilename with error HTTP ERROR: 404, exiting

More Currency Trading Information:

Related Articles

What are Your Options Regarding Forex Options Brokers?
Forex option brokers can generally be divided into two separate categories: forex brokers who offer online forex option trading platforms and forex brokers who only broker forex option trading via telephone trades placed through a dealing/brokerage desk. A few forex option brokers offer both online forex option trading as well a dealing/brokerage desk for investors who prefer to place orders through a live forex option broker.
E-currency Exchange Trading
If you are reading this article you are probably one of the many people who have spent countless hours searching for unique ways to make money on the internet. Very few people have gone on to succeed and most have failed miserably time and time again.
Forex Signal, Forex Signals Advice
There are lot's of Forex signals providers out there. New Forex traders might be thinking of looking for a reliable Forex signals provider.
Dont Deny Reality
If you want to be a successful trader, you must make sure you do not deny reality in any phase of your trading. You cannot deny losses, price direction, mistakes you make, being undercapitalized, or a whole host of things you would rather not think about.
Forex Options Market Overview
The forex options market started as an over-the-counter (OTC) financial vehicle for large banks, financial institutions and large international corporations to hedge against foreign currency exposure. Like the forex spot market, the forex options market is considered an "interbank" market.
Forex Signal Services
What are Forex signals? Forex signals are paid services offered by some brokers and independent Forex annalists. Companies that offer forex signals monitor and analyze the market for you, providing you with their data via desktop alerts, email or even SMS and pager alerts.
Advantages of Trading FOREX Over Stocks and Commodities
There are many advantages to Trading FOREX as your main income generator. Let's start by something that may be worrying you already.
ISO 4217 in Forex Trading
ISO 4217 is an international standard describing three letter codes to define the names of currencies established by the International Organization for Standardization (ISO).The first two letters of the code are the two letters of ISO 3166-1 alpha-2 country codes (which are similar to those used for national top-level domains on the internet) and the third is usually the initial of the currency itself.
Adaptation to the Realities of the Market
Do you think adaptation to the realities of the market is the most important thing?Many times in the past I've written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever changing. I've stated that mechanical systems may be workable, but for only a short time relative to the life of markets.
Financial Crises, Global Capital Flows and the International Financial Architecture
The recent upheavals in the world financial markets were quelled by the immediate intervention of both international financial institutions such as the IMF and of domestic ones in the developed countries, such as the Federal Reserve in the USA. The danger seems to have passed, though recent tremors in South Korea, Brazil and Taiwan do not augur well.
Online Forex Trading
Foreign exchange currency trading is also known as Forex trading, or FX, and has no single physical marketplace like the New York Stock Exchange does on Wall Street in New York or the Tokyo Stock Exchange does in Japan. The New York Stock Exchange and the Tokyo Stock Exchange online traders are limited to making purchases during the actual trading hours governed by New York Stock Exchange hours or the Japanese Stock Exchange's Tokyo hours.
Choosing A Forex Broker
With currency trading becoming ever more popular, the number of brokers is growing at a rapid rate. What should one look at when deciding which broker to open an account with? These are the important points to consider.
An Evaluation of the Devaluation
A Minister of Finance is morally right to lie about a forthcoming devaluation and a woman has the right to lie about her age. This is the common wisdom.
Forex Broker Involvement Optional
To trade on the forex market, the largest financial market on the planet, one must use a forex broker. Not unlike a stock broker, a forex broker can also makes suggestions about which moves to make when exchanging foreign currency.
Forex Trading Can Be Like Day-trading
Forex trading, or foreign currency trading, has become a bit of a craze of late, especially since it is something available to anyone who owns a computer. And anyone who is willing to put in some training time can profit from forex trading.
The Secret of Reduced Margin Spreads
One of the best kept secrets in trading is that of reduced margin spreads. You cannot name a trading method that provides more safety or a greater return on margin than does a reduced margin spread, while also being one of the least time- consuming ways to trade.
Trading Timeframes
Long TermLong term traders will work from end of day data and look to hold trades for a few weeks up to many months. Usually trend trading.
Reality of Online Forex Trading
Foreign exchange trading is the trading of currencies. Most currencies can be traded.
Forex Training: Follow Your Gut or Your Broker
Which way will the forex market move? Do you just follow your gut feeling? Or do you have Neo's sixth sense that would let you be one with the market and feel the underlying currents.Trading forex is a non stop action movie but a good one, where you really don't know who will win at the end.
Forex Profits
The Forex Market-What, When and Why?Forex, FX and the Forex market are some common abbreviations for the Foreign Exchange market. Actually it is the largest financial market in the world, where money is sold and bought freely.