Forex trading has become popular during the past decade and many investors are now participating in the world’s largest market. Approximately $3 trillion dollars a day are traded globally on forex exchanges. Forex trading is not for the faint of heart and market conditions can be volatile and exchange rates can change several times a day. Forex markets offer opportunities not available in equity markets. Once the domain of big banks and large corporations the forex market is now accessible to the average investor.

Trading forex allows the use of leverage. While leverage in equity markets is usually 2:1 leverage of 100:1 or even 400:1 is relatively common in forex markets. Leverage is defined as:

“The use of credit or borrowed funds to improve one’s speculative capacity and increase the rate of return from an investment, as in buying securities on margin.”

Or:

“The degree to which an investor or business is utilizing borrowed money.”

Leverage involves using collateral called margin to leverage a position that has more value. Currencies are traded in standard lots of 100,000 or mini lots of 10,000. Using leverage of 100:1 an investor could purchase a standard lot of 100,000 for $1,000. A leveraged position allows the forex trader to increase the financial gains from any price movements in currency markets. It is high leverage trading that separates forex trading from other kinds of investing.

It is the high leverage offered by forex brokers that attracts many investors. Obviously high leverage can mean huge profits but leverage can be a double edged sword. High leverage can also mean large losses. If a trader can handle risk issues adeptly leverage can be a great tool. Forex markets are unique in that they offer investors and traders the opportunity for huge gains even during the current recession.

For traders who have taken the time to educate themselves about the nuances of the forex market and are disciplined the use of high leverage offers opportunities that equity markets cannot match.