One main reason as to why most people get attracted to trading forex on platforms such as exness as compared to other financial instruments available online is because, forex gives out a high leverage as compared to stocks. While majority of traders have heard of the word leverage, few of them know what it means, the way it works and he way to it could impact directly to their bottom line.
The concept of having to utilize other people’s money in entering transactions can as well be applied to the forex markets.
Defining leverage
Leverage is known to involve having to borrow a particular amount of money which is required for investment in something. When it comes to forex, money is normally borrowed from the broker. Forex trading offers a high leverage in because the initial margin requires a trader has the capability of building up and controlling a huge amount of money.
Leverage in forex trading
In the foreign exchange markets, the leverage is normally as high as 100:1. It denotes that for each $1000 that you have in your forex account, you can be able to trade up to $100000. Most traders tend to believe that the reason that the makers of the forex market offer such leverage which is high is because; the leverage itself is a function of risk.
They are aware that if the account is managed properly, the risk is going to become manageable or else, it could be posible to not be offering the leverage, due to the fact that the forex markets for the spot cash are very big, and liquid, the ability of entering and exiting the trade on the level which is desired is much easier as compared to other markets which are less liquid.
When it comes to trading, the currency movements are monitored via pips, which is the change in currency that is the smallest and most depends on the type of currency pair. The movements are really a small fraction of a single cent. An example could be where currency pair such as the GBP/USD tends to move 100 pips from 1.9500 to 1.9600 which happens to be just a single cent move of that particular exchange rate.
That is the reason as to why the currency transactions have to be carried out in amounts which are sizeable, allowing thee small price movements to be translated into profits which are high whenever there is magnification via the use of the leverage. When you are dealing with an amount like $100000, there are small changes in the currency prices which can result in big losses or gains.
Risk of having extra real leverage in the forex trading
It is where the double-edge sword of leverage comes in, as the real leverage has the potential of being entangled in your profits or the losses by the same magnitude. The greater the leverage amount of the capital that you tend to apply, the higher the risk which you are going to assume.
