For those of us who do not have $10,000 to throw at the Forex market, it can be difficult to try and make a buck. For one, even if a currency that you own has a fantastic day increasing in your favor by 100 pips, and your account was at $100 — you would have literally made a dollar. A dollar a day is not really worth your time, so that is why traders add leverage.
Leverage is what it sounds like: the added proportional ability to increase the value of your investment. So, instead of investing only $100, many brokers will allow you to borrow and trade with $10,000. This means that if the currency pair moves 10 pips in your favor, then you have just made $10. The ratio for this level of leverage is 1:100.
This can give the Forex trader tremendous profit potential, simply because you can use other people’s money to help you increase your ability to read and play the currency market.
There are varying levels of leverage; however, it is important to note that it is usually best to use leverage sparingly, especially when the market appears volatile. Leverage can work both ways. While you may have the power to increase your profit potential 1:100, you also increase your risk by the same ratio. So, if you lose 10 pips, then you just lost $10 in value.
Strategies for Forex trading with leverage usually dictate that you should only employ it after determining your level of risk. With leverage, risk is the factor you should monitor most, especially since it increases at the same ratio when you apply it.
This means that it is best to use more leverage for currencies that are historically stable, and less for currencies that have a higher level of volatility. Using leverage pretty much requires the trader to be well learned in Forex market, especially considering the potential for a bad leveraged trade to wipe out the account.
These are the kinds of tools that make Forex increasingly accessible for the common trader. Before leverage, the Forex market was simply isolated to the few who had enough cash to buy large amounts of other currencies. Now that leverage is easily accessible, traders can be just about anyone who has a little extra cash and wants to play the Forex market.
Most Forex trading companies offer tools for trading with leverage. These can easily be employed, but again, be sure that you know exactly what you are doing before you place your orders. It is very easy to lose quite a bit of money, simply because you used too much leverage. This is the most common problem among currency speculators, so be sure to keep this in mind.