If you're one of the millions of people baffled by the financial news, you've probably heard of a term called 'leverage'. When used in forex programs, leverage is a very useful tool, and we're going to explain some key concepts about both forex and leverage in the next few paragraphs.
Right now, leverage is something of a 'dirty word', because investment banks made a hash out of overleveraging their positions during the housing bubble. A lot of forex traders do the same thing, but it's still a useful tool.
Here's how it works: You want to buy an option on several hundred thousand units of a currency, which you expect to be able to sell at a profit in a short period of time (hours to days on the outside). The problem is that you don't have the money to buy all that currency yourself.
So you talk to your broker, who lends you the money to buy the currency. The currency goes up, you sell it, pay back the broker with interest, and have a significantly larger profit.
Foe example, if everything works out right, you can take $1,000 of your own money, use it as collateral for a $19,000 loan, make 4% on the swing on the $20,000 currency trade you executed, turning $20,000 into, pay your broker about $200 for the use of their $19,000, and walk way with a $600 profit on your original $1,000 investment in the course of a few hours.
This is a fairly idealized transaction, and a lot of brokers try to pool small investors together to get more favorable rates on making leveraged bids. They can also be made 'in reverse' when you're playing a short position.
The problem with leverage is that it magnifies the risk. If you guess wrong, you may end up losing more money on a leveraged transaction than if you'd not taken the loan out entirely. While it's a valuable tool, it's the financial services equivalent of playing with a chainsaw.
This is the very basics on using leverage to swing bigger trades as a forex trader. There's a lot more to it, but with this, you should be able to understand a lot of what you're seeing down the road.
Wednesday, October 6, 2010
Use Forex Leverage to Make Money Fast
In forex trading (also know as foreign currency exchange or fx trading), you have the advantage of very high leverage, where you only have to pay a small part of the full value of your trading position. The high leverage level of currency trading allows you to make huge investments with small capital, unlike the stock market, where you have to pay the full amount of the purchase for the stocks.
The leverage level for currency trading can be as high as 200:1 or 100:1, depending on the forex broker that you are trading with, as well as on the size of the trading position. For example, if you want to buy $100,000 EUR/USD at the leverage of 200:1, you only have to deposit $500 into your trading account.
Financial institutions, corporations as well as individual investors have long used the advantage of forex leverage to significantly enlarge their trading profits by hundreds of times. In the forex market, the currency movements are in very small third and fourth decimal points, which are really just fractions of a cent. In order to earn decent profits, the trades are usually carried out in big amounts to allow these tiny price movements to be magnified, thereby allowing you to make money fast.
You have the freedom and the flexibility to select the leverage amount that you would like to trade with, based on your trading style, personality, risk tolerance and money management preferences. However, it is very important that you must always bear in mind that leverage can work for you, or against you in the same magnitude. Forex leverage can enlarge your profits, or your losses.
That is why it is of utmost importance that you know what you are doing before you start dabbling in currency trading. If it is done successfully, you can be very rich in a very short period of time, but if you do not know what you are doing, you can be in big trouble too.
The leverage level for currency trading can be as high as 200:1 or 100:1, depending on the forex broker that you are trading with, as well as on the size of the trading position. For example, if you want to buy $100,000 EUR/USD at the leverage of 200:1, you only have to deposit $500 into your trading account.
Financial institutions, corporations as well as individual investors have long used the advantage of forex leverage to significantly enlarge their trading profits by hundreds of times. In the forex market, the currency movements are in very small third and fourth decimal points, which are really just fractions of a cent. In order to earn decent profits, the trades are usually carried out in big amounts to allow these tiny price movements to be magnified, thereby allowing you to make money fast.
You have the freedom and the flexibility to select the leverage amount that you would like to trade with, based on your trading style, personality, risk tolerance and money management preferences. However, it is very important that you must always bear in mind that leverage can work for you, or against you in the same magnitude. Forex leverage can enlarge your profits, or your losses.
That is why it is of utmost importance that you know what you are doing before you start dabbling in currency trading. If it is done successfully, you can be very rich in a very short period of time, but if you do not know what you are doing, you can be in big trouble too.
Forex Leverage - A Double-Edged Sword
Forex leverage could be described as the needed amount of money given to you by your trading platform or broker to enable you participate in forex trading with little commission. This money is given to you to boost the amount of money you trade with in the market These leverages is what makes most traders attracted to trading forex.
But forex leverage is a double edged sword because in as much as it can help you make more profit, it can also cause huge losses. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money. To get the value of margin based leverage, divide the total transaction value by the amount of margin you are required to put up.
Margin-based leverage = (Total value of transaction)/(Margin required)
It is also advisable to use 1:100 leverage in forex trading to avoid higher risk. If you are required to deposit 1% of the total transaction value as margin and you intend one mini lot of USD/CHF which is equivalent to US$10,000 the margin required would be US$100. Thus, your margin-based leverage will be 100:1 (10,000:100).
Margin-based leverage in ratio Meaning
1. 1:400 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 400 lot
2. 1:200 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 200 lot
3. 1:100 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 100 lot
You can make decent profits and losses during trading when you monitor currency movements in pips which is magnified through the use of leverage. When you trade with a big amount by using higher leverage, a small in the price of currency can result in significant profits or losses.
But forex leverage is a double edged sword because in as much as it can help you make more profit, it can also cause huge losses. Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money. To get the value of margin based leverage, divide the total transaction value by the amount of margin you are required to put up.
Margin-based leverage = (Total value of transaction)/(Margin required)
It is also advisable to use 1:100 leverage in forex trading to avoid higher risk. If you are required to deposit 1% of the total transaction value as margin and you intend one mini lot of USD/CHF which is equivalent to US$10,000 the margin required would be US$100. Thus, your margin-based leverage will be 100:1 (10,000:100).
Margin-based leverage in ratio Meaning
1. 1:400 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 400 lot
2. 1:200 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 200 lot
3. 1:100 That means for every 1 lot/dollar you want to trade with, your broker will give you additional 100 lot
You can make decent profits and losses during trading when you monitor currency movements in pips which is magnified through the use of leverage. When you trade with a big amount by using higher leverage, a small in the price of currency can result in significant profits or losses.
Forex Trading - Use Forex Leverage Wisely
The Forex trade market has a distinct special feature that allows you to earn enormous profits fast- leverage. However, you have to use Forex leverage wisely as it can also bring you big loses fast, and even wipe out your investment completely.
Here's how Forex leverage works. You will have the power to trade your one (1) dollar capital to a position worth one hundred (100) dollars and generate profit from the one hundred (100) dollars, working on a ratio of 1:100. The leverage rates in Forex can go very high depending on the offer of the brokers. Do you now see the potential of earning huge profits just by leveraging?
But there's a downside to this feature. The risk of incurring big loses is equal as that of earning your huge profits. What this means is that with the ability of Forex leverage to transform the trade one (1) hundred times bigger, you are also capable to lose your capital by as much. Again, based on a ratio of 1:100, if the trade goes against your favor, you can lose your entire capital even on a single trading with leverage.
It is crucial therefore to know how and when to use Forex leverage to your advantage. Leveraging is used by Forex brokers often to attract people to trade big so the brokers themselves can earn big, as they earn interest from the amount that they lend you as leverage.
Forex leverage is an easy tool to earn big profits from the trade as long as you learn how to use it judiciously. You should be able to balance the upside and downside of leveraging to earn optimum results with minimal risks.
Here's how Forex leverage works. You will have the power to trade your one (1) dollar capital to a position worth one hundred (100) dollars and generate profit from the one hundred (100) dollars, working on a ratio of 1:100. The leverage rates in Forex can go very high depending on the offer of the brokers. Do you now see the potential of earning huge profits just by leveraging?
But there's a downside to this feature. The risk of incurring big loses is equal as that of earning your huge profits. What this means is that with the ability of Forex leverage to transform the trade one (1) hundred times bigger, you are also capable to lose your capital by as much. Again, based on a ratio of 1:100, if the trade goes against your favor, you can lose your entire capital even on a single trading with leverage.
It is crucial therefore to know how and when to use Forex leverage to your advantage. Leveraging is used by Forex brokers often to attract people to trade big so the brokers themselves can earn big, as they earn interest from the amount that they lend you as leverage.
Forex leverage is an easy tool to earn big profits from the trade as long as you learn how to use it judiciously. You should be able to balance the upside and downside of leveraging to earn optimum results with minimal risks.
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The currency market is a place where big money can be earned. This market has an average trading volume of over 3 trillion dollars, and the number of participants is growing every day. The forex market allows you to use one very special feature that is not as common in the stock market: leverage. However, the leverage of the forex market is not a simple 1:2 leverage, but 1:100, and sometimes even 1:400. This means that for every dollar you have in your account, you can trade one hundred dollars and profit from those hundred dollars.
Leverage can be great when the trade is going in your favor. Since the leverage makes the trade a hundred times bigger, your profits are also a hundred times bigger. This means if the currency pair moves 1% in your favor, you made a profit of 100%, or doubled your money. If the currency pair moved 3%, your multiplied the investment by four. With higher leverages, even a change of 0.5% can quadruple your money.
Although leverage is great, it can also wreck havoc on your trading account. Just as your profits, your losses are also multiplied by the leverage. If a trade is going 0.3% against you, you are losing 30%. If it is going 1% against you, your entire investment is gone. If you invested all your account balance into that trade, you will need to fund your account again.
The ugly truth behind leverage is that it is a great tool by brokers to lure traders and make huge profits. Leverage is a type of loan, so the broker is earning interest on the money it lends you for leverage. Also, brokers use leverage to attract traders, but they hide the risks behind shiny presentation of profits. Honest brokers mention that leveraging your positions can bring big losses with them as well as huge profits.
Handling leverage is very easy, and should be exercised by any trader. When opening a trade, make sure to select the proper amount of leverage. Most good trading systems automatically adjust the leverage for optimal results and minimal risks. This way you can enjoy both worlds - profit from leverage, but not be harmed too much from leveraging a losing trade.
Forex Leverage - The Good, the Bad, and the Ugly
The currency market is a place where big money can be earned. This market has an average trading volume of over 3 trillion dollars, and the number of participants is growing every day. The forex market allows you to use one very special feature that is not as common in the stock market: leverage. However, the leverage of the forex market is not a simple 1:2 leverage, but 1:100, and sometimes even 1:400. This means that for every dollar you have in your account, you can trade one hundred dollars and profit from those hundred dollars.
Leverage can be great when the trade is going in your favor. Since the leverage makes the trade a hundred times bigger, your profits are also a hundred times bigger. This means if the currency pair moves 1% in your favor, you made a profit of 100%, or doubled your money. If the currency pair moved 3%, your multiplied the investment by four. With higher leverages, even a change of 0.5% can quadruple your money.
Although leverage is great, it can also wreck havoc on your trading account. Just as your profits, your losses are also multiplied by the leverage. If a trade is going 0.3% against you, you are losing 30%. If it is going 1% against you, your entire investment is gone. If you invested all your account balance into that trade, you will need to fund your account again.
The ugly truth behind leverage is that it is a great tool by brokers to lure traders and make huge profits. Leverage is a type of loan, so the broker is earning interest on the money it lends you for leverage. Also, brokers use leverage to attract traders, but they hide the risks behind shiny presentation of profits. Honest brokers mention that leveraging your positions can bring big losses with them as well as huge profits.
Handling leverage is very easy, and should be exercised by any trader. When opening a trade, make sure to select the proper amount of leverage. Most good trading systems automatically adjust the leverage for optimal results and minimal risks. This way you can enjoy both worlds - profit from leverage, but not be harmed too much from leveraging a losing trade.
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