What is Forex Leverage?

What is Forex Leverage? learn more with LucrorFX.The foreign exchange currency, known more simply as Forex, is a market where a high number of banks, institutions and other special traders network to make speculation regarding the fluctuation of exchange rate. To put its popularity into perspective, activity in the Forex market on a daily basis is over 50 times that of the New York Stock Exchange daily activity. Often, novice traders attempt trading in Forex due to it being open at all hours, which allow them to trade after working a regular job. However, the risk is greatly increased with the role of leverage.

Forex Leverage

Leverage, whether in the Forex market or in any other market, allows a trader to take a considerably larger position than would otherwise normally be available with their given cash balance. While this does increase the chances that a trader can profit heavily, there is also an increased amount of risk involved.

With Forex, it is necessary to use leverage in an effort to obtain meaningful living, due to the fact that the exchange rates often vary in fractions of a penny. For example, being able to profit from a move that is as tiny as a hundredth of a percent, it is required to own very large amounts of currency. Just about all Forex brokers will also extend high leverage onto their clients in order to alleviate the experience of trading.

Leverage Ratio

The degree of leverage that is given to traders in Forex generally varies depending on the country. For example, it is possible to trade with 50:1 leverage in the United States. This means it is possible to multiply a cash balance by fifty in order to determine the power of one’s account. This means a Forex account of $20,000 is able to trade up to $1 million worth of foreign currency.

Determining the amount of units of a certain currency that can a person can trade requires multiplying the amount of cash that will be used within a trade by 50, and then dividing that product by the exchange rate. For example, trading $2,000 with a rate of 1.234 means that a person is able to purchase roughly 81,000 currency units, or roughly $100,000.

Forex Risks

If a person decides to purchase $2,000 worth of currency with an exchange rate being 1.234, then the move of a cent onto 1.244 would be multiplied by 81,000 units that would translate to either a profit or a loss of $810, depending on which direction the trade took. In other words, this could be a 40 percent profit or it could be a 40 percent loss, all from a single penny changing within the exchange rate, which underscores the great risk involved with leverage.

If a novice Forex trader does not understand these risks before going it, they tend to lose just about everything that they put into it in a very short time, sometimes as short as a few hours — it is that risky.

Learn more about Forex leverage by Contacting LucrorFX today.

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