Wednesday, July 23, 2008

The Magic of Leverage

Currency rate changes are very very small and measured in pips. If you wish to make large profits in foreign exchange a large sum of money must be invested.
As most of the larger amounts invested are only available to banks and and large financial institutions and corporations, a private individual must use a FOREX broker.

These brokers are allied with the large financial institutions and lend to individuals as leverage and is also called the margin.
The difference between loaned capital and invested capital is known as leverage
(margin) and this is the key to smaller investors entering the markets.

If you have $100 to invest with then the ratio of leverage is 100:1. This means that your $100 will allow you to trade with $10000 through your broker. As discussed previously because of the minute movements ( PIPS ) larger funds are needed to make significant profits and leverage via the brokers allows this to happen.

This is where education and extreme caution should be placed as you can make good profits or lose all your money. Forex brokers have margin agreements to put stop orders on leveraged funds allowing both them and you protection from losing your shirt !

Study the margin agreement your broker sends you, thoroughly and understand all the details you have signed up for. This is for your protection.

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