Key Facts about Leverage in Forex Trading

Leverage is a term that many Forex brokers use in order to attract new accounts. A high leverage ratio is quoted to many unsuspecting potential Forex traders who believe that a broker that offers the highest leverage will be the most reliable. This is not the case. There are many things that should be considered by the trader before he starts to trade Forex.
Here are the main things a trader must know:
– Leverage is a loan that is offered to a Forex trader by his forex broker so that higher value trades can be placed in the market place. This loan is offered in the form of a ratio and is based on the trading account that has been chosen, the amount of money that you choose to invest and the specific country that you are operating in. (Some countries mandate specific leverage limitations).
– The levels of leverage offered in Forex trading are far higher than the margins that are offered in the equity markets. This is because currency prices do not fluctuate as much as stock prices in a day and the change is about 1 percent at an average.
– Leverage can be obtained from the Forex brokers after opening a margin account with the broker. This allows for a Forex trade that is much larger and can produce larger profits.
– When a trade moves in the expected direction, the amount taken from the broker is returned to him once the trade is closed. On the other hand, if the trade ends in a loss, the trader may encounter higher levels of loss due to the leverage that has been used.
– Leverage is an option that Forex traders should use judiciously in order to ensure that they do not end up losing their life savings.. The size of the Forex market is so large that a small mistake can sometimes lead to huge losses.
– When deciding on the amount of leverage to use, risk tolerance should be kept in mind. This is the amount of money that you can lose without risking your lifestyle and family requirements.
– Last but not the least; leverage should be used as a tool to ensure higher levels of liquidity and not as a loan at all times. You should be extremely sure of the trade that you are making if you do avavail of leverage beyond your financial situation.
All in all, leverage is a great tool that every Forex trader has at his or her disposal. The trader must know how to use it correctly.

I hope the above currency trading information was of help to you.

Anthony DiChi at TradeCurrencyNow,
America’s Forex News and currency information source.