Leverage Forex

Using leverage Forex traders can multiply their profits in trading the currency markets. How is this possible? Using options trading, futures, or a margin account a trader can make his cash go farther and increase his potential profits in Forex. However, not all ways to leverage Forex work the same. We will look at options trading, futures trading, and margin accounts from the perspective of the foreign currency trader. Which works best? Which way to leverage Forex trading is more profitable? That depends upon a number of factors.

Options trading to leverage Forex works like trading options on stocks and commodities. The trader will buy calls of puts on one currency using another. The individual will be trading two currencies, the Euro and the US dollar, for example. Buying calls on the Euro with dollars will be exactly the same as buying puts on the dollar with Euros. That is to say the trader will pay a premium and gain the right to buy Euros with dollars at a set price, called the strike price not matter how much the exchange rate may vary. This right will last during the contract period of the option. If, as the trader expects, the Euro goes up versus the dollar, he will execute the options contract and buy Euros. Then he can keep the Euros or buy back more dollars, as the new exchange rate will make dollars cheaper. The flip side of this trade, buying puts on dollars with Euros works just the same. Because the trader only has to invest the price of the options premium he is not tying up a lot of cash as he waits for the market to change. He uses options trading to leverage Forex profits.

Using futures trading to leverage Forex is similar to options trading in that when the individual buys a futures contract he is guaranteeing himself the right to buy one currency for another at a specified exchange rate. He does not need to pay right away so he can leverage his cash as he waits for the market to change and for profits to come in. Unlike with options trading the futures trader in Forex has no option. He is obligated to buy, sell, or exit the trade before the expiration date.

Using a margin account to leverage Forex is what people typically think of when thinking of leverage in Forex. A trader sets up a margin account with a broker. The amount of leverage can be fifty to one, a hundred to one, or even two hundred to one. The brokerage will loan money in excess of the size of margin account and the trader will trade. Using huge sums of money the trader has the potential to trade small changes in a currency pair. Because a small profit per unit of currency times a lot of currency means a lot of money the trader can leverage small gains in the market into large gains in his trading account. Unlike trading options, however, there is a potentially unlimited risk in trading a margin account. If the trader does not set his stops properly or stays in a series of losing trades he can lose substantial sums of money and very quickly use up the cash in his margin account. At that time he will receive a margin call and will need to pay out of other assets in order to satisfy his debt with the broker, not to mention replenish the margin account and continue trading.