Leverage and Trading Forex
Many investors are attracted to Forex trading (it is one of the most commonly traded form of financial products), because of the high rate ofleverage often available; the leverage rates for Forex products can be amongst the highest available to financial traders. Leverage gives traders the ability to initiate trades with only a small amount of the capital usually needed to enter large trades. This means that the size of your trade is restricted to a far lesser degree by the capital in your bank account.
Leverage is generally expressed as a ratio. For example, a 50:1 leverage ratio means that for every €1 in your account, you can place a trade worth €50. With a 50:1 ratio, a trader would only need to deposit 2% of the trade to initiate a position/ (1/50 = 0.02 = 2%). So, to trade €100,000 of currency, a deposit of only €2,000 would be required. This differs from trading solid assets, where a trader is limited by his account capital. For example, if a trader has €2,000 in his trading account, they would only be able to trade €2,000 worth of currency.
Different leverage ratios are offered for different currency pairs. The leverage ratios of currency pairs that ETX Capital offers currently range from 14:1 EUR/HUF (Euro/Hungarian Forint) to 200:1 for pairs such as EUR/USD and GBP/USD. Leverage of up to 400:1 is also available for certain FX pairs on the MT4 platform; traders should keep in mind that leverage settings are changeable based on market conditions and that increasing leverage increases risk.
However, traders need to be aware of both the benefits and disadvantages of leveraged trading. Leverage can lead to large payouts, but alternatively may lead to losses larger than the amount deposited if the market suddenly moves against you. Starting out by using a small amount of leverage can help to minimise the risk of your trade – since increasing the leverage scale increases your risk. It can take the benefit of experience to know when to use leverage and to what extent, so be sure that you take the time to practice – perhaps by starting with a demo account.