In 2013, the average daily turnover in the global foreign exchange market was more than 5 trillion dollars. And despite a decline in the following years, it was still just over 5 trillion dollars a day in 2016.
It is clear that huge amounts of money are trading on the currency exchanges. Which means that there is the potential to make very big profits.
As with all trading, the larger your stake, the larger your potential profits. But not all of us have huge amounts of money to trade. The good news is that you can still make far bigger profits than you might expect from a relatively small amount. It’s all thanks to leverage.
Read on as we take at what a foreign exchange brokerage can do for you.
What Is Leverage with a Foreign Exchange Brokerage?
Leverage is making use of a relatively small amount in your account to control a much larger amount in the market.
So for example, if your foreign exchange brokerage offers leverage of 10:1, it means for every dollar you have in your account, you can trade with ten. Why would foreign exchange brokerages do this? The reason is that they make a profit on every trade you make, by taking a small margin on each one. And the more you trade, the more they make.
Offering leverage encourages trading which can only be good for the brokerage. Typically leverage can be up to as much as 100:1, although some will offer 400:1 or higher.
The Benefits of Leverage
The main benefit is clear. If you are making a trade with more money, if it is successful you make more profit.
A one dollar trade might make a tiny profit. With leverage, your one dollar trade become a one hundred dollar trade, with one hundred times the profit.
It also allows you to use your capital more efficiently; quicker profits mean more to reinvest into trades, so you can grow your account more quickly.
The Risks of Leverage
The main risk is also clear. If your trade goes badly with leverage of 100:1 you are risking a loss that is 100 times bigger.
In reality, most forex brokers have systems in place to close out trades once you are in a position to lose a set proportion of your balance, so you are protected from huge losses. But since your losses are magnified with leverage, your account can still quickly be eaten up by a few bad trades.
And the larger the leverage you take, the larger those losses can be.
We Can Help You Make the Most of Your Leverage
As we have seen, leverage through a foreign exchange brokerage is only a benefit when you’re successful in your trades.
One of the best ways to be successful is to make use of signals. And the best thing is that there are a ton of free forex signals out there for you to use. We have verified reviews of some of the best free forex signal providers out there.
And we also have an awesome blog packed full of great articles that can help you make a success of your trading. So make sure you take a good look around and put all that leverage to good use.