What is the highest leverage you can get in the forex market? The expansion of foreign trade has made the forex, or foreign exchange, market into one of the most profitable investments that can be made. And one of the most important keywords in that market is leverage. Leverage (which, it should also be mentioned is known by other names in other parts of the English-speaking world—the British called it gearing, while Australians call it solvency) is something that everyone who wishes to put his money into forex should be well acquainted with. This article will outline what the word means when used in this context and how to get as much of it as you can.
What is the leverage?
Leverage, as defined by Investopedia, involves borrowing a certain amount of the money needed to invest in something. When borrowing the money for forex, you will usually have to go through a broker. For an opening margin requirement, you can build up large sums of money and control them, and in that sense, the amount of leverage that you can get out of forex is quite high indeed. However, it is also a “double-edged sword.” Before we go into that, though, let us talk about how to calculate leverage.
There are several kinds of leverage. To figure margin-based leverage, divide the total amount of the transaction by the amount of margin that you are expected to put up. The formula for real leverage—what you are currently using—is to divide the transaction amount by your total trading capital (the amount of money that you have available for buying assets).
The meaning of leverage when applied to forex
Any time you make use of the Best Trading Platform to make an investment with anything, you need to consider how much leverage you will have. But when it comes to trading in forex, leverage gains a unique significance. Take the units of currency from any two nations and you will find that their average price “movement” is quite small – so small, in fact, that reporters quote these figures to the fourth decimal place, say 0.0003, or more commonly as three “pips.” The amount of leverage that you can get will most often depend on two factors – your forex broker, and how much margin deposit you are able to make. The broker will not want you to lose more than you have in the bank, so if such is in danger of happening, he is supposed to give you a warning call. He will then advise you to take one of the following two courses of action: Either close your account completely or else accommodate any other losses that might be forthcoming by depositing more funds into your forex account. While we are on the subject of brokers, you should realize that his objectives are not the same as yours. Even if you lose as a result of your investment, the broker will still be making money for himself.
Forex traders abbreviate the terms for the various national currencies in which they trade, usually with three letters—the first two for the country, and the third for the currency. Thus, USD and JPY stand for the United States dollar and Japanese yen respectively. Traders use these abbreviations when speaking of the trading ratios of the currencies; thus, you may read in a forex trading paper that the current USD/JPY ratio is 4:5.
The Goldilocks level—not too much, not too little
As we mentioned in our introduction, forex leverage can be a “double-edged sword.” This means that too much of it can be financially dangerous, as the risks tend to increase, even as the amount of money that you can potentially gain increases. If, for instance, you assume that the trading ratio between two currencies will decrease and so risk over twenty times your trading capital, but it actually increases, then you will lose a larger percentage of it then you would have you made the same assumption but only put in, say, four or five percent of that amount.
…But how much is too much?
The extent to which you depend on leverage in the forex market depends, above all other factors, on the volatility of that market. If it is moving slowly, then you can depend heavily on leverage, but if the market is highly volatile, then use leverage sparingly. The primary reason why people go into forex trading, to begin with, is that they have more leverage here than they could make trading in stocks. Sometimes people get greedy—and that is when trouble begins. Investors may purchase too much in too short a time period, or they may buy more positions than they can really control. The fact is that forex traders lose far more often than they win. Avoid falling into this and other traps and you will have just as much leverage as you need at any given point. Above all, do not overuse leverage, as this is the most common pitfall in forex investing. At 4xp you can get a free “practice account” that is potentially worth $10,000. Over two million people currently have accounts there.