What is the forex margin trading?

What is the leverage effect?

The leverage effect means how much times you can trade in comparison to the actual notional value. This name is derived from the "Principal of lever" which small power (small amount of money) with a stick can move a heavy and big stone (big amount of money for trading). The US hedge funds have made huge profits using this leverage effect successfully in latter of 1990's. According to some sources, they are heard that they put about 100 times as much leverage effect as the principals of their funds. This effect sometimes gives bigger chance to take huge profits, but sometimes causes bigger losses in the same way. A lot of hedge funds fell in default around 1998 as you remember.

The leverage is attractive

The forex margin trading has the great characteristics, so this is the high leverage. Assume that the mortgage loan when to borrow money from the bank. You can borrow some money within the collateral value of your land. If your collateral is worth about ten million Yen, it makes you possible to raise the fund up to 10 million JPY. If there is no need to raise, you have only to borrow money you need for the present, and it indicates there is more room to raise fund by borrowing money up to remaining 9 million JPY when you feel like.

The leverage mentions to the biggest possible amount of your position carrying in the forex margin trading. It shows how much times the margin allow you to trade. The margin requirement is indicated how much money you are required in advance to trade for each currency pairs, like USD-JPY, EUR-USD, GBP-USD. For example, 2,000 or 5,000 USD would be required for trade per 0.1 million USD. The smaller margin requirement follows the higher leverage ratio, needless to say.

Market risk is regardless of leverage

The market risk is dependent on the volume you trade, which is regardless of the leverage ratio. It depends on your choice whether you would have intention to trade the biggest position you are allowed to take. Higher leverage is often said to be more risky than the lower one, but you should understand the higher leverage allow you to some more rooms to decide the size of your position by yourself, which is quite advantageous for all investors because the amount of trading might become bigger using the same margin like the mortgage loan based on the collateral value.


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