Leverage in forex trading is used by traders and investors to increase the size of a trade by using borrowed money from brokerage firms. Forex trading using leverages means using credits from a forex broker while the funds in the trading account serve as collateral. Leverages are utilized by traders in the forex market to make profits out of various fluctuations in the exchange rate between two currencies. In other to receive a certain percentage of leverage from a fore broker, traders must first open a margin account. Although leverages have a way of increasing traders profits by taking advantage of rising opportunity in the forex market, it can also work against the trader.
THE CONCEPT OF LEVERAGES
Forex brokers offer leverages in the ratio 50:1, 100:1 and 200:1. However, the issue of a leverage is dependent on the broker and the trader’s size of trading position. For example, a 50:1 leverage ratio signifies that the least margin requirement the trader must possess is 1/5 which is 2 percent. This amount denotes the total value of trade available as cash in the trader’s margin account. The same thing applies to 100:1 which is 1 percent. Therefore, to trade with a leverage of 100:1, a trader has to make a cash deposit of 1000 dollars in his/her margin account in other to trade currencies worth 100,000 dollars.
ADVANTAGES OF LEVERAGES IN FORE TRADING
MAXIMIZES PROFITS FOR TRADERS
The most exciting advantage of trading forex with leverages is that it gives forex traders and investors the ability to make profits. Leverages have proven to yield a greater percentage of profits while exerting little efforts. Leverages can be used to trade all financial assets, it gives traders the opportunity of yielding returns by just staking a small initial deposit. As a trader, you can double the amount in your trading account in minutes. With a deposit of 1000 dollars in your margin account, you stand the chance of trading with 50,000 dollars when leverages are utilized.
EXPANDS CAPITAL EFFICIENCY
Aside from the advantage of increasing profits, leverage also upsurges capital efficiency. When leverages are used to trade financial instruments in the forex market, if a trader used two days to generate profits with his/her personal funds, leverages or borrowed funds from a broker can get the same trader or investor to make double profits is a shorter period of time. This alone is called an increase in capital efficiency. This gives forex traders the ability to re-invest their funds on several occasions yet to come thereby maximizing more profits.
DISADVANTAGES OF LEVERAGES IN FOREX TRADING
CAUSES SUBSTANTIAL LOSSES
Forex trading using leverages especially high leverages can cause a heavy loss to a trade and the account of a trader. Although leverages are known to incur profits, it also has the ability to make traders lose a whole lot of money. This is why it is referred to as a double-edged sword. For example, when a trade moves against a trader, he/she procures losses which eats up a significant part of this margin.
In conclusion, Leverages has its benefits and disadvantages. Traders should be careful when utilizing it in trades.