The Potential for Gain and Loss in Forex Leverage

By: Hillel Fuld

The tremendous success and proliferation of the Forex market, and specifically the retail Forex market can be attributed to many factors. However, there is really one major advantage that the Forex market offers individual traders over other markets; leverage.

The leverage in the Forex market is the highest in the world. Traders can hypothetically trade with a 400:1 leverage, enabling them to trade $200,000 with a minimal capital of $500. This is of course a very attractive characteristic of the Forex market.

However, before one begins trading Forex with a high leverage, it is crucial to understand that as great as the potential is to gain by using leverage, the danger of loss is equally large. It is important to fully understand this point, so let's see an example to illustrate it.

If trader A has $100,000 capital and trader B has $1,000 capital, and they both open positions of $100,000, the result of a %1 drop in the currency is significantly different for the two traders. It is true that they are both out $1,000 but those $1,000 signify all of trader B's account and only 1% of trader A's account.

Trader A can continue to trade with the other $99,000 of capital, while trader B is out of capital and his account is closed. So, it is true that one can make an instant fortune by taking advantage of the high leverage the Forex market has to offer, but choose your leverage with great caution as it can easily become the downfall and end of your Forex trading if you do not trade wisely.