In forex
trading, investors use leverage to profit from the fluctuations in
exchange rates between two different countries. Leverage is a loan that
is provided to an investor by the broker that is handling his or her
forex account. A typical Forex Broker would let you borrow 99% of the
total value required to open a trade and you only need to come up with
the remaining 1%. So if you are about to trade $1000 then you only need
to have $10. Big difference from normal stock trading. Also Forex
broker won’t charge you interest on the borrowed amount.
When
an investor decides to invest in the forex market, he or she must
first open up a margin account with a broker. Usually, the amount of
leverage provided is either 50:1, 100:1 or 200:1, depending on the
broker and the size of the position the investor is trading. Standard
trading is done on 100,000 units of currency, so for a trade of this
size, the leverage provided is usually 50:1 or 100:1. Leverage of 200:1
is usually used for positions of $50,000 or less.
To
trade $100,000 of currency, with a margin of 1%, an investor will only
have to deposit $1,000 into his or her margin account. The leverage
provided on a trade like this is 100:1. Leverage of this size is
significantly larger than the 2:1 leverage commonly provided on
equities and the 15:1 leverage provided by the futures market. Although
100:1 leverage may seem extremely risky, the risk is significantly
less when you consider that currency prices usually change by less than
1% during intraday trading. If currencies fluctuated as much as
equities, brokers would not be able to provide as much leverage.
Leverage
|
Amount Traded
|
Required Margin
|
1:1
|
$100,000
|
$100,000
|
2:1
|
$100,000
|
$50,000
|
50:1
|
$100,000
|
$2000
|
100:1
|
$100,000
|
$1000
|
200:1
|
$100,000
|
$500
|
400:1
|
$100,000
|
$250
|
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