What a Forex Trader Needs to Know About Leverage (Forex leverage)
Forex trading can be very rewarding financially if the forex trader knows how to consistently trade and create winning transactions. The tools which a forex trader is given should be utilized carefully and consistently. When creating forex strategies the term forex leverage comes into the picture quite frequently. Forex leverage gives the forex trader the opportunity to maximize their positions with a minimal amount of upfront dollars. When a forex trader leverages their positions they can either reap fantastic returns or potentially lose everything! Prior to jumping into the leverage game while trading the forex trader should have a full understand on what leverage is and how it works.
What is Forex Leverage?
What is forex leverage? The term margin and leverage are somewhat synonymous and can be used interchangeably. Usually, when a forex trader utilizes leverage and creates a trade, there is a requirement for the forex trader to submit a small amount of the position in good faith. The term leverage comes into play when we think about the small amount of dollars the forex trader has to put up to initiate a forex trade/transaction. When the forex trader only puts up a small amount of their own capital to initiate the trade the trade is considered to be leveraged. The amount of money which is required to be submitted for a forex transaction should be looked at as the margin requirement.
What Are Typical Forex Leverage Amounts?
The term leverage or margin should be looked at as the minimum amount a forex trader has to ante up to maximize their trades with house money. When utilizing margin and leveraging a trade there usually is a range that the forex trader works in and the amount of money they need to put down to leverage their trades. The amount that the forex trader typically will put down to leverage their trades varies from two percent of the value of the trade to one half percent of the value of the trade. In addition, the dollar amount of leverage which the forex trader can utilize to margin/leverage also varies. The amount which a forex trader can leverage off their trade can be anywhere from one to one hundred (1:100) or one to two hundred (1:200). As you can see the amount which the forex trader can take advantage of can be significant and reap huge rewards if the trade goes in their favor.
What Are the Downsides to Forex Leverage?
The forex trader must realize the potential losses of utilizing leverage prior to them establishing their margin limits. If/when a position moves against them when trading the losses which can be incurred will be significantly greater if the trader had not utilized the leveraged dollars available to them! The magnification of the potential loss cannot be overlooked by the forex trader. When utilizing leverage the forex trader should also have an iron clad strategy to preserve their downside. A stop loss maybe in the trader’s best interest when taking advantage of leverage. If a trade goes in the opposite direction he/she can utilize a stop loss which can minimize the downside of the trade.
What Are Typical Forex Margin Requirements?
How is a forex trader’s margin determined? Usually, the amount of margin a forex trader can utilize is directly associated to the country which the forex trader resides in. The forex trader when utilizing the services of his/her forex broker can see on the line of the trade/platform the amount of leverage he/she can use associated to the trade.
The amount of leverage a forex trader can use when placing orders is far greater than other financial markets such as the bond and or the equity markets.
What a Forex Trader Needs to Know About Leverage – Final Thoughts
In closing, forex traders should carefully study the upside and how to leverage their trades. If a forex trader can master the art of leverage they can earn a significant amount of money. If they jump into heavy amounts of leverage before they are ready, they can lose it all!
