Currency Trading Tips | Understanding Leverage

Currency Trading Tips | Understanding Leverage

For one of our Currency Trading Tips for this week, I am going to talk about the term “leverage”, and what it means to new investors. This term will be used frequently, and even more in Forex Trading. Leverage is where most of the risk of Forex trading actually comes from. With all of our currency trading tips, I always want to come back to potential risk that you can incur.

In Currency Trading terms, leverage talks about the correlation between your actual capital used in a forex account, and how much capital you actually control. Think of leverage of as borrowed money to make your small investment, extremely big. When talking about currency trading, there leverage issued is usually between 50:1 to 400:1. So how do you read this? It’s easy, I swear!

Our currency trading tips promise to open up your brain to forex trading tips, so this is how a new investor can read leverage. Basically, when you open a Forex account with a broker, and open a margin account, your broker should go over your leverage. For example, a 50:1 means that for every $1 that you put down, you actually have the buying power of $50! This means that the barrier to entry are practically zero, as opposed to other types of investment vehicles. This money is borrowed from your broker, so because of this, you forex broker will usually implement very strict stop losses for you positions.

For the big wig investors, forex brokers have been able to give them 400:1. As you can imagine, the potential to make big bucks is there, however the potential lose everything is also very prevalent. Although our currency trading tips tries to take a neutral stand on the topics we write about, we strongly urge new investors to be very weary of leverage. We are not saying that you won’t be careful, but leverage is a double edge sword.

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