Forex Leverage And Risks

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Forex Leverage And Risks

The leverage offered in the forex market is one of the highest that is offered to individual investors in the financial markets.  Leverage can be seen as a loan that your forex broker provides for you to trade with.

Levels of Forex Leverage

The ratio of leverage can start from as little as 20:1 and go as high as 400:1.  This means that your forex broker will allow you the option to trade up to 400 times the value of the actual amount you wish to trade.  Levels of leverage vary from one broker to the next and are dependent upon the size of the lots you intend trading.  Standard lots consist of 100,000 units of currency.  For trades of this size, your broker may allow you leverage of around 50: or 100:1.  The higher levels of leverage are normally offered for positions of $50,000 or less.

To take a trade of $100,000 with a 1% margin, you will have to make a deposit of $1,000 into your margin account.  The leverage that is provided on this type of trade is 100:1.  Although this may seem quite daunting and leverage of 100:1 may appear to be risky.  When you calculate that the changes in currency values could be as low as 1% per day, it does not appear to be that great a risk.

Before you go ahead and jump onto the leverage bandwagon, you must bear in mind that leverage gives you the opportunity to make huge profits, but it can also be your demise.  If the currency pair you are trading turns and starts moving against you, the amount of leverage will simply make your losses even bigger.  To try and avoid this type of loss, many experienced traders adopt a strict style of trading by using limit and stop orders.

The Good and the Bad Sides of Forex Trading

Factors such as the volume, volatility and the global structure of the forex market have attributed to its rapid growth and success.  The high level of liquidity allows investors to place very large trades without any real effect on an exchange rate.  The large positions that can be traded are made possible by the low margins set by most of the forex brokers.  The high amount of leverage that is offered by forex brokers is an added attraction to the market.

Another attraction to the market and one of the good points is the trading hours of the market.  The forex market trades 24 hours per day with a high level of liquidity throughout this time.  Traders who have a day job or who are simply too busy to trade on a full-time basis have the opportunity to trade at any time.  It is not necessary to wait for the market to open and rush your trades before it is due to close.

Although this is an exciting market for traders, it is a riskier market than stock trading.  The very high leverage ratios offered means that the huge gains that are possible may turn into huge losses if the market moves against you.  This is an important factor to bear in mind because the number of traders and the large amounts of monetary movement in this market causes traders to react extremely quickly as soon as new information has been released into the market.  This can cause fast moves in the currency prices.



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