Where does the leverage come from?

Let’s start by defining what leverage is

The financial leverage is doubling the amount you want to invest in order to be able to make good profits in the forex market, and it is one of the most important terms traded or used in the markets that you must know well, as the leverage allows traders to trade on much larger amounts of the deposited and used capital in Position trading, leveraged trading is also known as margin trading.

How does leveraged trading work?  

Where does the leverage come from?

When traders use leverage they borrow money from their broker to spend on buying assets. This allows traders to open more trades and buy more expensive assets than they can afford with their money alone. The question that is rarely answered is how a forex broker can provide such a high level of leverage?

These are the factors that allow to increase the leverage:

🔸Instant Deals
When a trader exchanges EUR for EURUSD in the spot market, this process simply involves an agreement to complete that transaction at a certain volume and price on the settlement date but without actual delivery of the currencies, and the transaction requires only enough margin to cover the expected fluctuations in the value of the contract required to open a trading position.

🔸Margin Requirements
Given that a forex transaction in the spot market is nothing more than an agreement to complete the swap at a future date, only a minimum amount of funds is required to cover the counterparty risk as the margin in the trader’s account covers this type of risk and it is rare for major currency pairs to go up or down Decreased by more than 1% per day.
Who determines the amount of margin used in a single trade?
The liquidity provider who determines the amount of margin.

🔸Liquidity Providers
Forex brokers maintain accounts with several liquidity providers such as banks, hedge funds and major financial institutions, with the liquidity provider providing leverage to brokerage firms.
What is the best leverage?
It is difficult to determine the best leverage as it mainly depends on the trader’s strategy and actual vision of upcoming market movements. Short-term traders try to use high leverage they usually look for quick trades, but for experienced traders and long-term investors they are in Often times they trade with low leverage.

🔸Roller-over mechanism
The trader can send the currency deal by extending the contract to the next settlement date in exchange for paying the so-called swap fee, and as long as the trader has enough funds in his account to cover the margin of up to 2% and the swap fee, the rollover mechanism helps the trader to avoid holding a large capital which It will be required if the transaction is settled with the trader’s money.

🔸Intermediary Financing
Forex brokers finance part of the margin requirements and the purpose of providing this financing is to increase trading volumes and this financing helps in increasing the level of leverage.

What is the available leverage?
At TNFX, the leverage available for trading instruments is as follows:
Currency pairs = 1:500 / Metals = 1:100 except XAU 1:500 / Energy = 1:100
Indices = 1:100 / Stocks = 1:20 / Cryptocurrencies = 1:5

🔸internal settlement
The broker’s clients usually open opposite positions on the same currency pair, and for this reason an aggregator program is employed which manages price flows from liquidity providers in a way that allows matching and settling these trades internally to provide significant leverage.

Leverage can increase potential profits but it also has the potential to increase potential losses, which is why you should carefully choose the amount of leverage in your trading account, trading this way requires careful risk management and many traders always trade with leverage to increase their returns potential on investment.

Is leveraged trading dangerous?
Leveraged trading is riskier than trading without leverage, as traders can lose not only their own money but also money they don’t have and, in some cases, traders may lose the assets they bought with leverage.

How is leverage risk managed?
Leverage can be used successfully with proper management. Stop-loss order should be used and small-sized trades should be used and the amount of capital per trade should be limited. You should note that the leverage is completely flexible and customizable according to the needs and options of each trader.

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