Online Forex Trading would not exist were it not for the concept of Forex Leverage. But just what is Forex Leverage? And how do you use it safely as part of your Online Forex Trading Strategy? Find out here.
Forex Leverage – What Is It?
The concept of leverage is used within many financial instruments such as margin trading of stocks and the futures market, however the forex currency market provides the most extreme example of it.
Imagine that you want to trade forex and you have $1000 to start with. If the currency moved in the direction you predicted by 1c in a day you would make … $10.00 . Now no matter how hard you try, making just $10 a day is never going to make you rich.
But imagine that, for your $1000 investment, somebody leant you another $99,000 so that an actual fact you were investing $100,000. Imagine that again you make the right choice, and the currency moves in the direction you predicted by 1c. Suddenly you have made $1000 profit. Now making money is suddenly a lot easier.
Essentially, this is how forex trading works – online forex trading is a leveraged investment that gives you an opportunity to invest much more money than you actually have in order to make greater profits. The companies that you setup your trading account with lend you money to make investments. They make their money by charging a small commission on the currency that you buy. At the end of the trade you give them their $99,000 back and take the profit/loss yourself. This allows you the opportunity to make much greater profits.
That’s A Lot Of Money I’m “Borrowing” … Is It Safe?
Any opportunity to make much great profits is also going to create an environment where you can make much bigger losses. In the scenario above, you could have doubled your money … but you also could have lost all of your investment – the $1,000 – known as your “margin”.
The main thing here is, the company will still get its $99,000 back. They are able to lend out this kind of money because overall forex markets move in a fairly narrow band – it’s not like a stockmarket where a company’s stock can suddenly be valueless … the currencies you trade will always have a value.
So … the only loss is your $1000 … now if that was the only spare $1000 you had then that is bad. You should never invest all your money on one trade – NEVER! But as long as that $1000 was only a portion of the money you have available to invest then you are fine – because as long as you are using a decent forex trading robot, you will make more winning trades than losses, and hence the value of your investments will continue to grow.
It’s as safe (or not) as you make it really.
We Exaggerated!
Of course, our example is an extremely exaggerated example just to prove our point. Forex Robots make they buy/sell orders within quite small ranges, and they place sell orders and stop loss orders in order to minimise any losses. Also, rather than making one big trade, they will make a number of smaller trades – and overall the majority of these small trades should be successful and hence you should make a good profit.
To Learn More About Forex Leverage
I’ve deliberately kept this article simple to make it easier to understand for those new to forex trading. To learn more about leverage and how it works, I recommend reading this article – http://www.investopedia.com/ask/answers/06/forexleverage.asp .
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