Leveraging is one of the powerful tools for active traders as well as investors who actually need to maximize their returns. Before we briefly discuss forex leverage trading, you should know what stock market professionals think about forex leverage. According to experts, leveraged trading effectively maximizes returns if it’s managed in a proper manner. So basically, forex account leverage is a type of short-term loan that a broker offers to assist you to manage high positions with a smaller amount of capital. Read the article and deeply understand in-depth facts of forex leverage.
What do you mean by forex leverage trading?
According to the experts, leveraged trading can also be considered margin finance or trading on margin that allows the trader to make a completely new position for trading with the help of lower capital & take a very big market position. Generally, this is nothing but a ratio of the amount in a trading account & the amount to be traded. Leverage always allows new and active traders to increase high exposure with a lower capital & it also depends on a number of factors such as trading experience, asset trading, broker, etc.
Key benefits of forex leverage trading
• Frees up the capital: It frees up the capital so a trader can commit a small fractional value of trading assets & make profits multiple times
• Significantly reduces the risks: With a low deposit amount, a trader can add several trading tools for an investment portfolio
• Enhances profitability: Forex leverage trading increases the profitability rate & also diversifies the risk by using a number of trading strategies.
How does forex leverage trading work?
Trading with 0 leverage:
For instance, if a trader has $1,000 in his or her trading account and wants to buy some shares from a corporation.
Current share price: $1.00
If the trader purchases 1,000 shares, the investment will be up to $1,000. If the price starts increasing approx. 5%, the trader will sell the position at $1.05/share:
Now, the return will be: 1,000 x $1.05 or $1,050 and net profit = 5% or $50
With leverage:
Using 20x leverage, if a trader purchases some shares of a company, the trader can purchase more than 20,000 shares or up to 20 times
Latest share price: $1.00
Margin cost (Actual): $1,000
Exposure: $20,000
Just like the previous one, if the share price starts increasing up to 5%, the trader can sell the position at $1.05/share
Now, the return will be: 20,000 x $1.05 or $21,000 & net profit: 100% or $1,000 of investment
Wrapping up
According to market research, many traders & investors are not aware of the major risk as well as perks of using forex account leverage. Leverage and margin trading are both significant tools for providing great flexibility as well as market exposure, but before you invest your leveraged funds in the forex trading markets, it’s important to understand the potential risks and clear your concepts as well.
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