Forex trading is very much in vogue and because of its advantages over stock trading, 4 trillion dollars are traded daily in the Forex Market.
Brokers often extend loans to those trading in forex. This is why foreign exchange trading is so lucrative, because traders have to put in only a small margin of the entire trading amount. The amount of 100,000 US dollars is standard lot for forex trading.
Leverages are dictated by the brokers. They ask a percentage of the total deal that they require you to have as an account balance in your bank account. This is called the margin and only after you assure them of this, will they proceed with the order. This is a very powerful tool as with a 2% margin, you can participate in a contract of 50,000 dollars with just one thousand dollars in your account.
Brokers are careful when they trade on leverage on your behalf. Your funds or margin serves as a collateral. They will not allow your balance to fall below that by closing a trade that looks like it is losing potential of being a winning trade. Some brokers issue what is called a margin closeout that causes all open positions to be closed and the account is blocked.
New traders are advised to trade in currency pairs with lower ratios even though it is tempting to go with higher ratios, because in forex trading there is also the equal risk of losing large amounts of money which total up very quickly too. This is because the large amount of money involved attracts a lot of players who are continuously tuned in to the forex market information coming in and their actions and reactions to it change the price of the currency pairs constantly
So much said, it is the broker providing the leverage who calls the shots during trades. You need to read the disclosures to understand what you are getting into with a broker. Beginners would do well to practice on paper trade which is provided by many online trading platforms before getting into the real forex market. It is best to use a broker who has a good reputation. Check with all the brokers who provide practice trading platforms and go with the one you are most comfortable with.
What to look for in a broker
- Promptness of action when first contacted and quick response in setting up the account.
- Good reputation, and good reviews from users.
- Good servers for efficient and effective online trading without slippages and constant requoting
What to remember about leverage
It can lead to heavy losses as it happened when in January 2015, the Swiss national bank decided to stop pegging the value of the Swiss Franc to the Euro. With the artificially strong Euro crashed, pushed its value relative to the Swiss Franc into free fall and those brokers who had borrowed funds to provide high leverages to their customers found themselves completely wiped out when they could not liquidate their trades quickly enough to save their capital. So here, not only the customers, the brokers too are destroyed. Their only recourse is to recover losses through their clients.
Smaller traders feel the losses more than bigger counterparts.
When prices move fast, the dangers of leverage are exposed.
Remember to open the appropriate type of account with your broker. If you are a beginner, open what is called a mini account. The leverage offered on these is high.
All in all, there is a silver lining to leverage and that is you may make a lot more money than what was invested, but you cannot lose more money than you have invested.
About the author: For tax accountants Sydney Stephen is the right person. He has worked as an accountant in a number of small to large accounting firms in Brisbane. In 2008 he founded Blake & Co Accountants and in 2009 he founded BrisTax. Professionally, he specialises in income tax. He has for many years had a keen interest in both business and technology.