Forex Trading Leverage

Forex Trading Leverage

Submitted by adil on Wed, 05/21/2014 - 18:42

Understanding Forex Trading and Leverage

Are you thinking about doing a reasonable business that offers you some decent and quick return against your investment? If the response to this is “Yes” then you should try exploring and understanding a specialized form of trading i.e. ‘Forex Trading’. One of the reasons to prefer Forex trading instead of other trading options is that it can provide you with much higher leverage.

What does Leverage Mean?

Leverage means to borrow some for investment purpose. In Forex trading usually an investor or trader borrows this money from the broker. The trader can fulfill initial margin requirements set by the broker in order to get into a trade and thus get a chance to trade and control huge amount.

How Leverage Works?

It merely depends upon the intelligence and active-mindness of a trader to make maximum profits from Forex trading transactions. There are two important terms that you, as a trader, must understand very well, concerning Forex Trading.

Margin-based Leverage = Total Value of Transaction/ Initial Margin Required to Join Trading

Real Time Leverage = Total Value of Transaction/ Total Trading Capital

Where ‘Total Value of Transaction’ means the actual total value of Forex based transaction that is taking place”. ‘Initial margin required to Join Trading’ means the amount that is required by the broker from the trader to invest initially in order to be part of the Forex based transaction and ‘Total Trading Capital’ means the actual trading amount invested by the trader.

For example, you are a trader who is interested to become part of a Forex transaction offered by the broker. This transaction involves $ 100,000 subject to USD/ JPY currencies. The broker has set up a generic margin requirement for the trader(s) to join into that transaction as $1000. You have $ 10, 000 in your account. You do initial research and analysis and decide to participate in the trading transaction by paying the initial margin to the broker i.e. $ 1000. You also decide to open a $100, 000 positions and trade one standard lot by trading $10, 000. Now:

•    The margin based leverage would be 100,000/1000= 100: 1 = 1% of total transaction value.

•    Real time leverage rate is 10 times of your account’s amount.  

How Leverage can impact?

In Forex trading, the small changes in currency values are very important to consider, and the currencies must be traded in a bigger amount to get reasonable and bigger amount of profit. Obviously the loss would occur at the same level as the profit is expected.

Real leverage is very important fact to increase your profit if applied intelligently. It can be understood by the help of following example.

A trader with trading capital of $ 10, 000 trades with a broker at 1% marginal deposit. He analyzes and finds out that USD/ JPY rate is rising and thus decides to trade for acquiring a position in $ 100, 000 transactions. You decide to trade at real leverage rate of 50 times of your account’s amount (trading capital). Now if the trade is successful then you will get a good profit, and if it is not successful then you need to bear the loss at same rate, as well. There is another option that you go for trading at a rate of 5 times of your trading capital. A much wiser and better option would be to minimize the risk amount in case of an unsuccessful transaction.