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Forex leverage & spread

Forex leverage & spread

Leverage

FX trading is considered the most lucrative and challenging trading market globally.

In addition, forex leverage trading is a popular option among traders since it allows for increased profits and increases your total loss.

Leverage trading has many benefits. First, it frees up capital by requiring you to commit only a portion of the value of the assets you are trading. As a result, you can take more influential positions than if you sold the actual underlying asset. Leverage implies you can make the most of your money by investing in various assets rather than just one or two. Beware that when you trade with margin, you should always keep sufficient balance in your account to prevent margin calls.

When trading with leverage, an investor has the option to deal with 100 or even 200 times the value of their investment. In addition, investors do not have to consider interest because traders will pay no interest if they keep the position for less than a day. Furthermore, if you keep your position, you will be paid interest if your currency has a lower interest rate than the currency you buy, a so-called carry trade. Carry trading is a trading technique that involves borrowing at a low-interest rate and investing in a higher-yielding asset. A carry trade happens when borrowing in a currency with a low-interest rate and changing the borrowed money into another currency. However, trading with leverage is not without risk. The main risk while trading is the currency risk. Currency risk will impose additional costs or interest if the currency weakens against the other.

What is the spread in forex trading?

The spread in forex trading is the difference between the price people ask and sell for expressed in pips. Generally, there are two variants of spreads — fixed spreads and variable spreads.

Fixed spreads remain consistent regardless of market conditions. In other words, the spread is unaffected whether the market is erratic or relatively quiet.

Brokers who operate on a “dealing desk” model offer fixed spreads.

To elaborate, the broker buys prominent positions from their liquidity provider(s) and offers them to traders in smaller sizes through a dealing desk. A dealing desk means that the broker is the counterparty to their clients’ trades. Because they can control the prices they present to their clients, a forex broker with a dealing desk can offer fixed spreads.

Some brokers do not allow fixed spreads since they cannot control the prices presented to their clients. Variable spreads are dynamic, and the difference between the bid and ask prices of currency pairs fluctuates with varied spreads.

Non-dealing desk brokers provide variable spreads, meaning they do not influence the spreads, and spreads will broaden or contract depending on currency supply, demand, and overall market volatility. In addition, variable spreads usually increase during economic data releases and lower when trading activity ceases.

 

Leverage in a nutshell

If we’re sincere, leverage is not that scary. If you know the essentials and are aware of the risks and advantages, there is no reason to be afraid of it. Of course, traders should never use leverage when they are entirely hands-off with their transactions. Still, some traders can use leverage productively with correct management. Always handle leverage with proper precautions!

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