FOREX Leverage: Win Big, Lose Big
For investors that use leverage, FOREX is one of the best investment options available. The FOREX market is unlike any other market in the world. With a daily volume upwards of $2 trillion, the FOREX market is vastly bigger than other markets. Investors in the FOREX market are hoping to bank on the small fluctuations in currency exchange rates. If they can accurately predict the fluctuations, they will be able to profit from the exchange. Without leverage, the FOREX market would not have such amazing potential. With the use of leverage, tiny fluctuations can turn into big money. Here are the basics of leverage in the FOREX market and how it works.
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Trading With Leverage
In order to trade in the FOREX market, most investors need to use leverage. In the old days, you had to have a large amount of money to invest in the FOREX market. Most investors were prohibited because they did not have enough capital. Then, the allowance of high levels of leverage made it possible for almost anyone to get involved.
Now when you open a FOREX account, you will usually be given an option as to what level of leverage you would like to select. The most common options for FOREX are 100:1 and 200:1 leverage. When you open an account, you can pick one or the other. If you pick 100:1 leverage for example, in order to control $100,000 worth of assets, you will only need to deposit $1000 into your account. This presents a huge opportunity for investors with limited funds to invest.
Win Big Lose Big
With leverage, everything in FOREX is magnified greatly. Your wins are bigger and your losses are bigger as well. Just a small little fluctuation in the exchange rate between two currencies can make a huge difference in your account. When a currency only moves a tiny little bit, the move is magnified by 100 times in your account if you have 100:1 leverage.
This makes the game of FOREX much more risky than any other investment. When compared to other forms of investment, the margin allowances are much larger. For example, when you trade equities, you may be allowed to trade with 2:1 leverage. When you trade in the futures market, you may be able to receive 15:1 leverage. One of the smallest leverage amounts that you will find in FOREX is 50:1 with most accounts being at least 100:1.
The reason that this is possible is because the FOREX market does not fluctuate very much from day to day. In fact, the overall exchange rate of most currencies will fluctuate less than 1% during the course of the day. This represents a very small number in comparison to other markets. This makes it possible for brokers to offer these huge amounts of leverage as compared to other investment possibilities. Before you get involved in FOREX, make sure that you understand the large risks that you are taking with your money.
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