Leverage: a Double Edge Sword
In Forex trading you have the versatility and flexibility to choose amount of leverage that suits your money management and trading style. Leverage has the ability to increase the size of your earnings or losses by the exact same degree. The greater the leverage value with the capital you entered is as high as the risk that you will take.
Leverage is borrowing a given amount of currency required to make an investment. In Forex, that amount of money is typically lent by a broker.. High leverages is offered by Forex brokers in the impression that for an initial investing required, a Forex trader can control a very huge sum of money.
Currency transactions needs to be administered in large amounts, allowing price movements in every minute to be converted into decent earnings enlarged by the leverage applied. Whenever you trade or transact with a large amount for example a $100,000, tiny movement in the currency price can cause a big profits or losses.
In Forex trading, we track the movements of currency in what we called as pips; this is the smallest change in the price of a currency against another currency, in most currency pair it is in fourth decimal position of a price. These changes are just fractions of a cent, like the currency pair EUR/USD. Example when EUR/USD change from 1.6200 to 1.6300, that is a 100 pips movement which in exchange rates it is just a 1 cent move.
This is just one of the reasons why a lot of individuals are drawn to Forex trading when compared to some other investment resources. Usually (depending on the broker) you are allowed to get a lot bigger leverages than you can with stocks. While there are so many investors that have heard of this word (leverage) only a few really know about what leverage is and how it works for you or against you.