The concept of leverage can be one of the most challenging to understand, especially as it relates to margin. We’ve been asked by several clients how 1:1 leverage works when trading FX. Given the frequency of the question, we’d like to share the answer with our audience.
1:1 leverage simply means that one is trading forex without any type of leverage. In practical terms this means that if you exchange 1,000 Euro for the equivalent in dollars, you would need to exchange the full amount.
How Does 1:1 Leverage Work In the Forex Market?
To better understand this concept, let’s imagine that you are at the airport currency exchange booth. If you’ve ever exchanged your money here, you are essentially trading on 1:1 leverage. Taking the example further, let’s say that you exchange 500 worth of Euro for dollars during a visit to the United States. Unfortunately, you misplace the money you exchanged, only discovering it in your pocket at the airport. When you look at the exchange rate, you discover that during your visit the dollar strengthened significantly, so when you exchange your money back, you receive 580 Euro, netting a small profit. In this hypothetical example, you made a trade on 1:1 leverage because you exchanged the full amount.
The Advantage of Leverage When Trading Forex
The reason leverage exists is that currency valuations are small in nature from day to day. Generally speaking the Euro only moves 1 or 2 cents from day to day. With leverage, though, investors are able to maximize returns (and also losses) by having more money at their disposal.
As an example, a broker offering 100:1 leverage would allow a trader to leverage up to 100,000 units of currency (US dollars, Euro, or British pounds) but only have to put up $1,000 in margin. This is why it doesn’t make sense for a broker to offer 1:1 leverage since it is rare that someone would wish to put up the full $100,000 to trade.
Forex Consulting – Consultation Services for New and Experienced Traders Alike
If you are new to FX trading and are looking for the right broker to partner with, we are happy to assist you. We are more than happy to refer you to several reliable and trustworthy forex brokers. Get in touch with us today to explore this opportunity further!