Understanding Leverage

When you are dealing with Forex trading, you need to come to the realization that there are many concepts in Forex that are synonymous or at least similar with many of the concepts in other forms of trading. This is because trading in financial sectors, regardless of what those sectors are, is essentially the same deal. You have money and you use that money to buy something. If the value of that something increases then you make money but on the other hand if that value decreases then you lose money. It is a very simple system that applies to all different forms of trading. One of the concepts that people need to understand is leverage and the rest of this article is dedicated to explaining exactly what leverage is.

The Concept

The concept of leveraging is not one that is particularly difficult to understand and indeed many people have started their Forex careers without actually understanding what leverage is. Nevertheless, it is always good to understand the concepts involved with your livelihood so that nothing surprises you if an emergency should crop up. Understanding the different concepts is the way to prevent nasty surprises from cropping up. The concept of leverage is one that applies to a number of different walks of life. Leverage is simply the act of using something or someone in order to increase the impact, whether positive or negative, that a specific event has on a specific circumstance. A batter uses as baseball bat to leverage their strength in hitting and a Forex broker uses margin buying to leverage their spending power when it comes to entering into different trades.

The Application

As previously mentioned, leverage is generally a very broad term that can be applied to a number of different circumstances in life. The application of the term leverage to the Forex market usually results in margin buying. What you do with margin buying is that you essentially borrow and then pay back money in very quick stretches. Many Forex accounts will let you plunk $2000 into your Forex account and then use that money to control a full lot ($100,000) for the purposes of trading. So you essentially are borrowing $98,000 for the purposes of the trade and paying it back right after the trade is over. There are a number of different reasons that this works, but the main one is that you will have a stop loss in place to prevent losing more than your account on any single trade. Leverage of this kind is really what makes it possible for average Joes to make a living from Forex almost right off the bat and therefore it is very much appreciated in the world of Forex trading.

Leverage and Forex trading

Leverage is not a difficult concept to grasp and indeed since all of the Forex brokers that are worth using do automatic leverage on your behalf, it is not a concept you really even need to know to survive in Forex trading. The reason it is important to learn is in the event that the brokers stop doing that automatically or alternatively if you decide to branch out into other forms of trading.