Using Leverage In Forex – profitable effect observed
While doing trading, we are required to constantly monitor the currency movements in pips. This is nothing but the smallest change in the price of the currency. The price change could be as small as up to the second and fourth decimal: this, in turn, depends on the currency pairing. But we need to know that these movements are nothing but real fractions of a cent. I can explain this through an example. Consider that we are dealing with a popular currency pair, GBP/USD. 100 pips of this currency pair move from 1.9500 to 1.9600; this means that the exchange rate deflection has been quite minuscule of up to 0.01 $ on the exchange rate.
The currency transactions always need to be executed in large amounts: these will permit minute price movements such that they are converted into reasonable profits. This is conducted through extensive leverage. In forex trading, it is recommended that you deal with huge amounts of money, such as 100000 $. It is only then that you will accrue huge losses or profits from the exchange of currency. We need to know that the freedom and flexibility for selecting leverage will be grossly based on the style of trading, and your preferences in terms of personality and money management.
In the world of forex trading, we need to use leverage to gain sizeable profits through the fluctuations happening in the exchange rates that are happening in various countries. Leverage in the forex market is quite huge. How do we define leverage? It is a loan dispensed to an investor by the broker. It is used for the purpose of handling the forex account. The amount of leverage in the forex market can be provided in the following ratios: 50:1, 100:1, or 200:1. The ratio will be determined through broker and investor trading.
While trading a currency of 100000 $, we involve a margin of 1 %. The investor is required to deposit just 1000 $ in their particular margin account. In this type of trade, the typical leverage provided is 100: 1. This type of leverage is much greater than the conventional 2:1 leverage dispensed in the equity market. On the other hand, the futures market will provide leverage of 15:1. One may think that leverage of 100: 1 is very risky. But you need to know that the risk gets diluted as currency prices report a daily fluctuation of just 1% in intraday trading. Brokers will be unable to provide this much leverage when the fluctuations are comparable to that produced by equities.
All said and done, leverage provides a significant step in gaining profits in the forex world. But there are always two sides to the same coin. It can also work against the investors in some cases. Losses will be highly amplified when the direction of movement predicted for a currency turns out to be untrue and the currency trends show an opposite trend.