There are several methods to apply leverage through which you can increase the actual purchasing power of your investment, and Forex margin trading is one of them. This method basically allows you to control large amounts of money by using just a small sum. Generally, currency values will not rise or drop over a certain percentage within a set period of time, and this is what makes this method viable. In practice, you are able to trade on the margin by using just a small amount, which would cover the difference between the current price and the possible future lowest value, practically loaning the difference from your broker.
The concept behind Forex margin trading can be encountered in futures or stock trading as well. However, due to the particularities of the exchange market, your leverage will be far greater when dealing with currencies. You can control as much as up to 200 times your actual account balance – of course, depending on the terms imposed by your broker. Needless to say that this may allow you to turn big profits, however you are also risking more. As a rule of the thumb, the risk factor increases as you use more leverage.
To give you an example of leverage, consider the following scenario:
The going exchange rate between the pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for one pound sterling). You are expecting the relative value of the U.S. dollar to rise, and buy $100,000. A few days later, the going rate is GBP/USD 1.66 – the pound sterling…