Traders who leverage currency make the most amount of money with the least amount of capital. Currency speculators get the benefit of very high liquidity combined with very low margin requirements when they leverage forex transactions. Some accounts require a margin as little as 0.5% of the borrowed amount, a staggering 200: 1 ratio. For those not familiar with this concept, this means that an investor with ten thousand dollars in his account could purchase two million dollars worth of foreign currency.
While that is an extreme example of the purchasing power of a trader who opts to leverage forex, it is not abnormal to see traders operating at ratios in the vicinity of 10: 1. Imagine a couple of scenarios where this trading tactic is being employed in the foreign currency market – for example a dollar / yen trade. What would be the return on investment if a trader bought ten thousand dollars worth of Yen at 100 Yen per Dollar and the dollar forex rate weakened to 95 Yen / Dollar?
In this case the trader would take his $ 10,000 and initially buy 1,000,000 Yen. Later, the speculator sells its Yen to buy dollars and gets $ 10526 dollars in return (1,000,000 / 95), a 5.26% gain on the trade.
What would have happened had the trade been a leverage forex trade with the purchasing power amplified to 10: 1?
In this case the trade would put up $ 10,000 and buy ten million Yen (borrowing $ 90,000 in the process). Of these one million are bought with capital, the other nine million are bought on margin . Providing all the other results were the same (exchange rate drops to 95 Yen / dollar) and the resulting out put transaction yields $ 105,260. The trader returns the $ 90000 borrowed, leaving $ 15,260 ($ 10000 initial capital plus $ 5260 profit). This equals a 52.6% gain – ten times what was made without the leverage forex trade.