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.
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