Have you ever wondered why forex trading leverage gets talked about so much?
If you have ever considered trading the Foreign Exchange market as a way of making some cash, you will have probably seen the word 'leverage' used at some point. The word 'leverage' refers to the ability to gain an advantage at little or no cost, and this is no different when used by Forex traders and brokers. In simple terms, leverage in Forex is the ability to trade large volumes of currency with only a small amount of money invested in that trade.
In Forex trading, leverage is used every day in trades worth hundreds of thousands of dollars each, and yet the traders only have to risk a fraction of the amount traded. The brokers 'lend' traders the bulk of the money used to trade, because statistically 95% of the time the trader loses!
It simply makes good business sense for the brokers to allow trades to go ahead with only 1% of the value put up by the trader, because if such a trade then devalues by 1% it is immediately closed and the broker has made a profit from you on the spread.
Leverage is usually expressed by two numbers like this - 100:1. Given that forex trading leverage enables individuals the ability to trade alongside large banks and financial institutions, it is no wonder that they are so popular.