It can boost your profit but also blow up in your face!

Using Leverage In Currency Trading

May 3 by Jitan Solanki

Did you know that the world’s currency trading volume amounts to over $5 trillion every single day? (In case you were wondering, there are 12 zeros in a trillion!) That would make even Bill Gates’ fabulous wealth look like a paltry sum in comparison. And many traders flock to it like frat boys to a beer keg because of leverage.

But first, let’s focus on the immense size of the currency trading market for a minute. That’s a boatload of money to be changing hands every day via investment banks, online brokers and even central banks. To put it into perspective, the New York Stock Exchange has a daily trading volume of around $20 billion a day. It’s pretty clear who’s the big dog in this scenario.

Of course, that $5 trillion represents the entire global currency market. As a retail trader, through awesome trading apps like BUX, you can trade something called the spot market which amounts to about $1.5 trillion. The spot market basically allows you to settle your trades instantly. Essentially, you can bank your profit or take your loss at the time of closing your trade. It definitely beats having a payment plan for your hard earned profits!

So here’s the funny thing: you’re probably already currency trading without even knowing it! It doesn’t matter whether you’re a stock trader, or a complete noob who hasn’t traded any type of financial instrument before. Every time you go on holiday and exchange your currency for another, you are effectively currency trading.

All a currency trader does is pay a little more attention to the details in a bid to turn a profit from the different exchange rates and twenty-four hour price movements. One of those details is the use of leverage.

 The devil’s always in the detail!

 

What Is Leverage & Why Use It When Currency Trading?

Anyone involved in currency trading uses leverage. Depending on how you use it, it can be both good and bad. When it comes to trading the markets, leverage means you can control a large position using very little of your own money.

In essence, the broker will stump up the difference and use your small position as margin so you can deal in the larger position. What? Why the heck would they do that? Well, they have the fancy technology to make it easy for traders to do so and they get paid their commission based on the size of the larger position. It’s a win-win.

Of course, because you are using only a small amount of money in your account (that’s known as margin) to trade a larger position, it can increase the potential profit and loss of your invested capital. For example, let’s say you decide to buy the GBP/USD currency pair because you believe it was due to move higher. Most brokers only need 1% of margin to trade currencies. Therefore, to control a $100,000 position in the GBP/USD currency pair, the broker only needs $1,000 from your account. (Obviously, you don’t need that much money lying around to start currency trading but I’m just using fat, even numbers so the example is clearer!)

As you are now controlling a $100,000 position with just $1,000 in your account, your leverage is 100:1. Now let’s say your position moved up by $1,000 to $101,000, which is 1% of the total position. As your return is on a 100:1 leveraged account, you’ve made 100%. You only risked $1,000 of your own money (the margin) to make the $1,000 return. Sounds unbelievably good, right? But remember: if the market moved down and you lost $1,000, then that would also be a 100% loss on the amount you invested.

 Please use leverage responsibly, folks.

 

How To Use Leverage Responsibly With BUX

So you’re probably excited about using leverage when currency trading – but perhaps a little scared too. No sweat. Let’s have a little walk-through on how to use leverage responsibly within the BUX app.

Let’s say you decided to buy the EUR/USD currency pair this time. You go into the BUX app and you invest £100 on the trade. At this point, you have an option to increase your leverage on the trade using the Multiplier feature. Let’s say you select 10 on the Multiplier. This means you are leveraging your position ten times as much. Now, you are controlling a position worth £1,000 using just £100!

You are now in a leveraged trade controlling a larger position with a smaller amount. This means that you can profit faster from smaller moves in the market. However, it also means you could lose money more quickly if the trade doesn’t go the way you planned. It’s a double-edged sword so handle that blade cautiously.

 

The Risks Of Excessive Leverage & BUX’s Flexible Multiplier

Of course, as BUX believes in responsible trading, you can never lose more than the amount you have invested. In the example above, your maximum loss would still be £100 even though you could potentially profit from your £1,000 leveraged position.

Even better is the fact you can change your Multiplier amount mid trade! With the Flexible Multiplier option, you can increase your invested amount whilst keeping the value of your trade exactly the same. Find out more about BUX’s Flexible Multiplier.

Written by

Jitan Solanki

A self-certified trading junkie, he's not your typical heavy metal drummer and international traveller. But he loves to share his ideas and passion to all, no matter where he is in the world. He has a lot to share with over ten years experience trading stocks, commodities and foreign exchange. Connect with him on BUX: jitans

Disclaimer: All views, opinions or analysis expressed in articles are that of the author and do not represent the views of BUX. Neither BUX nor the author provide financial advice and these articles should not be construed as such.

All posts
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.7% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.