Leveraged FX trading
A lot of the platforms online where consumers can engage in forex trading offers leveraged FX trading. If you are offered to do leveraged FX trading, it means that you are offered a line of credit that you can use for your trading. Leveraged FX trading is the same as trading with borrowed money. This means that it is possible for you to lose more money than what you currently have in your trading account, and you could end up owing the platform money.
How much money can I borrow?
This will vary, both from one platform to another, but also on an individual basis. It is up to the lender to decide how much you can borrow. Generally speaking, FX trading platforms are more keen to offer big credits compared to stock trading platforms. For the individual trader, it can feel exhilarating to go from the 1:20 leverage offered by the stock trading platform to the 1:200+ available at the FX trading platform.
It is not difficult to find platforms where even a small-scale hobby trader will be allowed to borrow 50 or 100 times the amount of money in his or her account. If you have 500 USD in your account and is offered leveraged FX trading at 1:100, it means that you can borrow up to 50,000 USD.
At some platforms, and for some traders, the available line of credit is considerably greater that this, e.g. 200 times or 500 times the amount of money in the account.
It should be noted that the size of a position can impact the amount of leverage extended to you buy the platform. This is because a large position is seen as more risky than several small position. A platform can for instance be willing to lend you 1:500 for positions smaller than 50,000 Euro but only 1:200 for positions that exceeds this size.
Why is the platform so willing to give me credit?
FX trading platforms that are generous with their credit offers are typically platforms that make a profit on each trade on the platform – regardless of whether it is a winning or losing trade for the client. When a platform earns a profit based on how much money you are trading, that will be a strong incentive to lend you money to make it possible for you to engage in high-volume trading.
Positive aspects of leveraged FX trading
- You can trade large volumes without tying up a lot of your own capital. Instead of depositing €20,000 to trade with, you deposit €100 and make use of the 1:200 leverage to trade with €20,000.
Negative aspects of leveraged FX trading
- You can lose more money than what you have sitting in your account, and you can end up owing the trading platform money.
- FX platforms tend to employ automatic stop loss when a client engages in leveraged FX trading. While this is often hailed as a risk mitigation tool, it can actually increase risk since it has the capacity for turning a small dip into a huge catastrophe for the client. The automatic stop loss will sell off currency even when it is clear to the client that this dip will just be a very short-lived one.