A very common practice in Foreign Exchange Trading, leverage is a form of financing purchases on a margin account. The Forex terminology “margined account “refers to a leverageable account which is leverageable. In this account, Foreign Exchange Trading is purchased using either cash or collateral according to pre-determined levels of credit set by a broker or collateral held by brokers.
Leverage, in most cases, is to all and intents and purposes a loan in the Forex dealers margined account. The dealer’s loan is collateralized or guaranteed by their initial margin (deposit).
In an ideal world, Forex dealers should have no need for leverage, but this is far away from being the case. In actual fact, the whole Forex business is based around leverage
A margin requirement in Forex dealing means the current state of the dealer’s cash flow. Interest rates offered by brokers can vary dramatically; the factors that determine this are the broker’s policy towards leverage and the dealer’s credit history. The interest rates and service charges imposed by the brokers can greatly affect a dealer’s profit margin. The proliferation of dealers in the market, and the strong competition to attract their business, has led many brokers to offer very attractive terms to dealers. Some of them are even bordering on the irresponsible, in some extreme cases; a dealer can receive a leverage margin of 1%. Meaning that by depositing $1,000, a dealer can enjoy a $100,000 line of credit. This is pretty extreme, and will require that the dealer deposit large cash sums with the broker and have established a decent credit history as well as a history of responsible trading.
Where dealers have to treat their leverage position in Forex with great respect is when their broker begins to feel that the dealers position is weakening. This may be on one front, or several fronts at the same time. The broker may request a margin call, In the event that the dealer’s margin even on one certain position, begins to drop, the broker will require the dealer to make up the shortfall. If the dealer is unable to make up the shortfall by paying cash, they ,may well have to sell of part of the position, In certain conditions the broker may even close of the dealers position, to protect their interests. The dealer then will have to meet the shortfall in cash, and their credit status will be affected in the future.
To sum up, leverage is a great tool for Forex dealers, and can be the difference between profit and loss for their business. However the dealer should never assume that the money forwarded is their’s to play around with, The brokers are watching his every move and any signs of a possible loss will be blocked quickly and effectively and without pity or compassion.
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