Leverage – a Forex Trader’s Friend

Forex, Foreign exchange, Currency trading, or FX trading is the trading of currencies in the international market.

forex-leverageKeep in mind that every foreign exchange transaction always involves simultaneous buying of foreign currency and the selling of another. Furthermore, every currency has an interest rate attached to it set by the central bank in the country the currency belongs to. As a result, every trader who takes part in the foreign exchange trade is obliged to pay the interest rate of the sold currency and has the right to earn interest in the purchased currency.

In finding forex brokers, you need to find a broker that has a low spread (the difference in the price between a currency that can be bought and sold), the support of a reputable institution (a bank or lending institution), and various trading tools and support to help you with your trading in the foreign exchange market.

In the forex world, leverage (always expressed in ratio) is simply defined as the borrowing of money from a broker to increase a trader or client’s potential profit in currency trading.

For instance, a forex broker offering a leverage ratio of 200:5 means that the broker is willing to lend you $200 for every $5 of capital. In fact, there are forex brokers that offer a ratio of as much as 250:1.

Remember though, no risk, no gain. Sure, low leverage actually means a low risk in maintenance call or margin call (the need to deposit more money in the firm if you’re the value of your investment decreases during a time frame), but it also means lower returns.

With a brokerage that has a high leverage ratio, the risk for margin calls is greater but so as the gain.

The bottom line is that, when hunting for a forex broker, go with the one which offers the widest choice in leverages. Wide leverage options mean you can take risks depending on the current forex news or currency trading news, the latest trends or if you are feeling lucky, on your whim.

However, if you are on a budget, then choosing a forex brokerage firm with the highest leverage is the best option for you.

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