One aspect of trading Forex online that you will need to have a full understanding of is something known as Leverage. This can often be quite confusing to anyone who has never traded currencies online at a Forex Brokers, but once you understand what it means and how it affects your day to day trading you will be able to spot the best Brokers offering a higher level of Leverage to their clients.
In its most basic form Leverage is a figure which is displayed as a ratio and this is the margin requirement that each Forex broker will operate to. There are a couple of ways that this will be expressed the first is as a ratio and will be displayed as a percentage or it can be presented as odds.
So for example is you see the Leverage displayed at any Forex Brokers as 50 to 1 this could also be displayed as a Leverage of 2%. Leverage is simply the amount of cash that you must have available in your trading account for you to be able to place a Forex trade at that respective Forex Brokers.
Optimizing Your Forex Trades Using Leverage
The amount of Leverage you will find available at any Forex Brokers is going to vary from site to site. Whilst some Brokers offer a minimum amount of Leverage if you are prepared to shop around your will find no shortages of Forex Brokers offering you very high levels of Leverage.
If you do intend to trade Forex online then there are many pros and cons of using Leverage and we will now enlighten you on some of the benefits and risks you will be taking based on just which levels of Leverage you choose to take advantage of.
If you come across a Forex Brokers that is offer you Leverage of the fairly standard amount of 50 to 1, then that means that you are going to be able to place Forex Trades of up to $50 in total for each $1 you have in your trading account at the Forex Brokers.
By taking full advantage of Leverage this does of course mean even the most modest sized trading account balance is going to allow you to make some fairly large valued trades. The main benefit of using Leverage is that if you have an account balance of say $1000 then you are going to quite easily be able to use those funds to trade and earn profits as if you had placed trades worth a massive $50,000!
However, there is a down side of using Leverage in this way for you will also be running the risk, should you place a losing trade, of losing out financially much quicker, and when your trades are performing badly then you could quit easily trigger a Margin Closeout which means the trade will end and you will have made a loss.
As a first time Forex Trader or even an experienced trader you will find that many of our featured trading sites will allow you to adjust and alter the amount of Leverage you can use on your account, and as such if you are a very conservative type of trader then you should choose to lower your Leverage to give you a much lower risk element in regards to the Forex trades you place.
What is a Margin Closeout?
If you choose to place Forex Traders using Leverage then what you are doing is basically borrowing funds from your Broker, and the collateral for you borrowing those funds will be the amount of cash you have deposited and have available as cleared funds in your trading account.
With this in mind all Forex Brokers are not going to permit your trading account to fall in value below the minimum margin required to place any type of Forex trade using Leverage! Your Forex broker is always going to be working out any unrealised value of all of your open Forex Trades and they will then allocate to you something known as a NAV which is a Net Asset value.
If at any time your open Forex Trades have lost their potential value that will result in your trading account balance is in danger of becoming wiped out or not being able to sustain any more trades the Broker will then place a Margin Closeout on your trades.
This Margin Closeout is going to instantly close all of your currently open trades and then your account balance will be adjusted to take into account the losses you have sustained, which will not expose you to even further risk or losses.