Forward Diary

Forex - Leverage at work

Virtually all FX brokers offer their clients leverage – typically of 100:1 to 200:1 – meaning they can participate with a much smaller initial outlay than the typical $100,000 standard contract size. At leverage of 100:1, an investor opening positions with a value of £100,000 will need to make an initial outlay of just £1,000. As with other trading vehicles already mentioned, the amount of money you put forward as deposit is known as margin and you may be subject to margin calls to cover losses. It would therefore make sense for newcomers to start more cautiously. Fortunately, most brokers allow traders to set customised levels, so you could start out with a cautious margin trade of 20:1, say, until you’ve got to know the ropes better. Many retail brokers offer a ‘mini account’ option, with a contract size around a tenth the value of standard accounts at $10,000 of the base currency. Trading with 50:1 lever- age would therefore mean that $200 of mar- gin would control a $10,000 contract. FX brokers typically do not charge com- mission fees and instead use the familiar bid- offer (or ask) spread system. But interest is charged – or paid – for holding positions overnight, known as the rollover rate.  As with other leveraged markets, order types such as limits and stop losses are available for FX trades to help manage risk and return. FX positions may be classed as ‘intra-day’ or ‘overnight’. An overnight position is one that is still on when normal trading hours end. It is then automatically rolled over to the next day's price. Intra-day positions are those that are opened after the close of normal trading hours. Order execution is instantaneous and you will normally receive a fill conformation within one or two seconds. Usually, traders will leave a position open until it has reached a sufficient profit level, a stop-loss order has been triggered or funds are needed for a better proposition. The low cost of forex trading makes it an appealing proposition for active traders, many of whom will take advantage of its commission-free nature to trade many times a day. The frequency of trading changes with market conditions but for a small to medium player around ten trades a day is typical.   This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions