Forex Leverage

If so many traders are interested in trading the forex market, it’s mostly because of the industry’s high leverage capacities. Using leverage, traders can significantly increase the potential profit on an investment. Leverage trading, or Margin Trading, also means that traders don’t have to deposit the full value of their positions and can thus hold positions that are worth much more than their account capital (up to 200 times).

Forex provides much more leverage than other financial markets such as stocks or futures for instance. Unlike active stocks whose prices may move from 5% to 10% a day, the volatility of currencies rarely exceeds 1% on a daily basis. In the world of forex, a one cent move (around 100 pips) in a currency value is actually considered a significant fluctuation. When trading forex, leverage is thus a way to earn higher returns on relatively small market movements. Trading currencies with a few thousand dollars and without leverage does not make much sense since return would be insignificant.

Leverage and Margin

In forex, when you leverage a position, you put down collateral, also known as margin, to enter a position whose value is much greater than this collateral. Finotec offers several leverage options, up to 200 to 1. This means that with a $1,000, you can purchase $200,000 worth of a currency. However, although leverage is a great tool to increase your buying power and use less capital to trade, it also comes with great risk. If the market moves against the trader’s position, the loss sustained by the trader will be far more significant that it would’ve been without leverage. For this reason, some traders prefer to test the market sentiment by first applying small leverage and opening small positions. If they see that they were right and that the market is moving in their favor, they hurry to increase leverage for maximized profits.

Traders must remember that in forex, leverage is a double-edged sword: while it can multiply your gain potential exponentially, it can equally magnify your loss potential. We therefore recommend that traders new to the forex market start trading with small leverage options.

One last word about leverage: like with margin, leverage can also be utilized with other financial instruments such as futures and CFD.

Video Guide: Leverage Explained on Video Leverage is one of the major benefits associated with derivative trading and at Finotec, the leverage options we offer for our various products are among the most attractive available.
What is Leveraged Trading? Watch the Finotec video lesson number 5: See on video how leverage works concretely. Understand how margin and leverage are connected and what this means when opening a position on our trading platform.