Leverage is a very crucial part of forex trading. Forex traders like to trade in high volumes for greater profits. But this does not mean that they always have the right kind of money. How to gain a good amount for smallest fluctuations then? This is where margin money and leveraging comes into the picture.
Suppose you have $50000 and you are leveraging at 200:1, then you can use $250 to trade the share at such volumes. As soon as the share loses 250 dollars, the deal gets automatically closed. This would mean that .5 percent is all that the share needs to fall for the deal to get stopped. Nevertheless, it gives the traders wholesome opportunities to earn through an extended range of profit. This is how leveraging lets a trader deal in high volumes. It can be a great ally of those who know the precision entry and exit points more often than not.
Generally, the leverage spread is between 50:1 and 200:1. Having said this, leverage of 500:1 is also not unheard of. So when your share is trading in the right direction, you can keep amassing profits with what you have as leverage. Traders use leverage to lever their investments with instruments like futures, forwards, options and margins. As about the companies, we know how it loves the idea of selling the stock for raising capital. This is done through public issues. At the same time they also use the concept of debt financing based on leverage. This gives them their capital base and provides the shareholders with increased shares.
In the forex market, $100000 is the most standard unit of trading. For such currency volume, leverage provided is generally 100:1.when one looks to trade in high leverage, the issue of small fluctuations going against him becomes all the more imminent. While 400:1 is actually dangerous, 100:1 is actually quite safe as currency ‘dips’ or ‘soars’ are not beyond 1 percent for an intra day trading. If currency were to be as volatile as share market, probably 15 percent leverage would have been risky just as well.
Because a highly leveraged seller is pre-inclined to lose, a broker fashions it out this way. All over a broker’s site, you would find leverages of 400:1. You would assume, that’s quite healthy as nearly no capital is required. Unfortunately, 9 out of 10 times, it is healthy for the broker.
If you are a smart operator and you know the precise stop losses that you need to put then leverage can work for you in a big way. Forex trades happen expeditiously. This means that a small movement in the opposite direction and you will be stopped out. Such wiping of position as suggested earlier becomes more fearful with higher leverage. If you are playing many short frames in a day and it’s a rough day in the wind then higher leverage would mean plenty of consolidation the next day.
Know your margins, play with low leverage and if you know the game then you are bound to make a fortune with some perseverance.