| Foreign exchange risk is the probability of loss | | | | But if the exchange rates moved adversely against |
| occurring from an adverse movement in foreign | | | | this forex trade and the investment lost value and |
| exchange rates whilst holding a long or short position. | | | | we ended with $99,500. |
| Managing Foreign Exchange Risk | | | | If we had invested at a leverage of 1:1 then a loss of |
| One of the advantages that attracts investors to | | | | $500 is no big deal when compared to your starting |
| forex trading is the higher leverage available when | | | | account of $100,000 but if we had used leverage |
| compared to the other financial markets. | | | | 100:1 then a loss of $500 is 50% of the the starting |
| One of the biggest mistakes a newbie forex trader | | | | account and a 50% loss is major loss whatever way |
| can make is not understanding the effect leverage | | | | you look at it. |
| has on their bottom line. | | | | How to use Leverage to minimize your foreign |
| Leverage - What is it? | | | | exchange risk |
| In relation to the foreign exchange markets, leverage | | | | With the above examples, it is not hard to see that |
| is where an investor can control larges amounts of | | | | one of the most important aspects of managing |
| foreign currency with a small deposit (margin) whilst | | | | foreign exchange risk is ensuring that you apply |
| borrowing the remainder from the forex broker. | | | | suitable leverage to your |
| As an example, with an $1000 deposit (margin) an | | | | The higher the leverage the bigger the profits but |
| forex trader can control $100,000 worth of foreign | | | | the downside is the highly leverage accounts also |
| currency. This leverage, is expressed as a ratio of | | | | have potential to rack up massive losses. |
| 100:1. | | | | By choosing the correct leverage for your account, |
| If we decided to invest in $100,000 worth of foreign | | | | this will enable you to place your stop loss orders |
| currency, which then increases in value to $100,000, | | | | with enough room to cover any spikes in the forex |
| an increase of $500. What is the return on | | | | market. |
| investment? | | | | Every forex trader will at some time or other have a |
| It all depends on the amount of leverage, if we had | | | | series of trades go against them. This is the nature |
| invested at a leverage of 1:1, which would mean | | | | of forex trading. But having a run of losing forex |
| investing $100,000 to control $100,000 worth of | | | | trades and too much leverage will result in your |
| foreign currency. The return on investment would be | | | | account being emptied in a flash. |
| $500, or a 0.5%. | | | | The majority of the forex brokers will have a range |
| Hardly worth the effort. | | | | of different leverage options. So ensure that you |
| If we had invested at a leverage of 100:1, which | | | | pick the correct leverage for the size of your trading |
| would mean investing $1000 as a margin to control | | | | account. |
| worth of $100,000 worth of foreign currency, then | | | | To be a successful forex trader it is essential to |
| the return would be a whopping 50%. Happy days. | | | | have a good foreign exchange risk and money |
| Leverage is a two way street | | | | management strategy. |