Understanding Forex Leverage
Forex Trading involves a whole lot of financial instruments, one of the common factors why forex has attracted so many people, is because the leverage is higher in forex than with stocks. Every now and then you will hear the word ‘Leverage‘ – and it takes some research to understand everything – especially forex – you need a thorough understanding before getting involved in the market.
Leverage is borrowed capital, used to invest in something, whereas in Forex is the money borrowed from a broker. Forex Trading has the highest leverage of all Markets, so much that it builds up and allowing a trader to control a lot of money.
Sometimes you need to understand the calculations involved in forex – If you need to calculate margin-based leverage, the total transaction value needs to be divided by the amount of margin required to make open a position.
|Margin-Based Leverage =||Total Transaction Value|
|Margin Required to open a position|
Leverage is commonly expressed in ratios – an example would be, to control a $100 000 position – your broker will set aside your $1000, in this case, your leverage will be 100:1.
$1000 x 100 = $100 000, This gives you an opportunity to control $100000 with $1000, using a borrowed capital from your broker – Leverage has been seen as “a double-edged sword.” or “a two-way street.” and this is true in all levels.