How Leverage Works in the Forex Market

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How Leverage Works in the Forex Market

• Presented byThe Forex Secret

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Concept of Leverage

• Used by both investors and companies
• Investors use to significantly increase the
  returns
• Lever their investments by using various
  instruments
• Companies can use leverage to finance their assets

In other words, instead of issuing stock to raise
capital, companies can use debt financing to
invest in business operations in an attempt to
increase shareholder value. 
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Using Leverage in Forex

• Investors use leverage to profit in exchange
  rates between two different countries.
• The highest that investors can obtain

• A loan that is provided to an investor by the
  broker
• A trader first open a margin account with a forex
  broker
• Leverage provided is either 501, 1001 or 2001

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Leverage Ratio
A 501 leverage ratio means that the minimum
margin requirement for the trader is 1/50 2.
A 1001 ratio means that the trader is required
to have at least 1/100 1 of the total value of
trade available as cash in the trading account
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How Leverage Can Backfire
Although the ability to earn significant profits
by using leverage is substantial, leverage can
also work against investors
For example, if the currency underlying one of
your trades moves in the opposite direction of
what you believed would happen, leverage will
greatly amplify the potential losses.
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How Leverage Can Backfire
To avoid a catastrophe, forex traders usually
implement a strict trading style that includes
the use of stop orders and limit orders designed
to control potential losses.
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