Leverage – Significant Role in Forex Investments
Forex can be elaborated as Foreign Exchange comprises of the exchange of one form of currency for another specific currency. It has high liquidity and is also characterized as an OTC or Over The Counter market.
This market is also quite volatile, since the values of currencies indicate trends of crests and troughs due to political events or economic developments occurring across the world.
It is extremely important that traders keep themselves informed about the news about markets, domestic and international, so that they can speculate the movements of currencies accurately. With correct outcomes, this investment can reward traders with high outcomes, which greatly increase the appeal of Forex.
Leverage is an important aspect in the field of Forex investment, and it is essential to understand the concept and purpose of leverage when planning to invest in Forex.
It can be described as an instrument that allows traders to amplify their amount of investment, even when there are limited funds in the trading accounts. With leverage, traders can exercise increasing purchasing power in the Forex market, thus enhance the odds of earning profits.
With this instrument, if traders are confident that current trends are moving in their favor, then they can make use of leverage, and boost their profits considerably.
The practical application of leverage can be explained with an example.Assuming that the leverage available to a trader is 100:1, then this describes that $100 can be used for investment in place of every $1 present in the traderâs account.
Thus if traders who have $2000 in their account, can use leverage to invest $200,000 in Forex, thus increasing their investment exposure well beyond the actual amount of funds available in the account. Forex trading platforms describe the leverage that they provide in the form of a ratio.
These ratios can vary with different brokers, with some trading platforms offering values that are as significant as 200:1 and 300:1.
Leverage is a tool, the application of which rests on the proficiency and expertise of traders. One needs to understand that just as increasing the profits, leverage can also amplify the potential losses, if the outcome turns out to be unfavorable. Hence, it has to employed after extensive planning and analysis.