The basic idea of Forex trading is gaining a large sum of money with the help of a small initial investment. Basically this sounds to be something impossible for the Forex market, where the trading is being done based on lots consisting of 100,000 units of a currency. So what to do if you’re a not a millionaire?
Thus the concept of leverage is introduced. It gives a chance to raise the capital without using stocks: instead you use debts as an investment in a deal which will allow not only to return the debt but also get more money from the deal.
But how does this work with Forex? Well, here it is a loan provided by the broker, who is in charge of the investor’s account. The amount of the leverage differs based on the initial agreement between the broker and the investor, the size of the position, the broker company and many other factors. The most common leverage options are 50:1, 100:1 or 200:1. Typically the 50:1 and 100:1 leverage comes with the trading done on 100,000 units, otherwise we have the 200:1 case.
For example, if you plan to trade $100,000 of currency, then with 100:1 leverage the investor will have to put just $1000. This might sound to be rather risky, but it’s not that real if you consider that the change of the currency prices drop by no more than 1% in a daily trading process, when the margin for the broker here is 1%. Still if the fluctuation of the currencies comes to equities, then the broker will no longer be able to provide that much leverage.
The use of leverage is rather useful for gaining more profit, but it can also work against the investor. In case if the currency price goes up/down in opposite to your expectations, then you might not only lose your money, but also get into a large debt. For this purpose the brokers usually use stop and limit orders, which mostly limit the amount of the money that an investor can put into the trading. Another option made by brokers is the offer to the investor to put more cash into the deal if they consider the trade too risky at some point.
Forex traders can be very successful with the right tools at their disposal. FXCM provides any and all traders with the most comprehensive tools for the trade