Leverage and Fundamental Forex Trading

Leverage and Fundamental Forex Trading

By: Paul Bryan

Leverage is the ratio of total capital available to actual capital, which is the amount a broker will lend you for trading. For example, if the ratio of 10:1, your broker will lend you $10 for every $1 of actual trading capital you invest.

Most of the forex brokers offer leverage at least 100:1. Forex market offers higher leverage as compared to any other financial trading markets. Leverage also facilitates the forex traders to maximize their trading profits. With the help of leverage, a trader can make use of as high as 200 times the actual sum against the investment. It is a tool for using various economic parameters, such as margins.

Although leverage is a very powerful tool, it should be handled carefully, making sure that you have thought and formulated a risk management plan. You should always apply leverage on a small position or deal size. If it works successfully, it should be applied further on a bigger sum. Here leverage and fundamental forex trading plays an important role.

You can apply leverage frequently but wisely on your daily trading if it is backed by systematic fundamental analysis of the market. As leverage facilitates traders to make full use of the short-term instability or variations experienced in the forex market, it is closely linked with the trend and movement of the market. Market trends, in turn, are always influenced by the global political and economical situation, which can be rightly judged by fundamental analysis.

Fundamental analysis is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy, and societal factors. Fundamental analysis alone is difficult to use when dealing with forex, and other margined products.

Because, it does not provide the specific entry and exit points, and therefore makes it difficult to control risk when using leverage. However, fundamental analysis can be used as a guide to judge overall direction or trends in a market.

Forex traders using fundamental analysis rely on news reports to gather information about economic, political, and social parameters. When applying leverage for the trading you must consider this wide perspective where a tiny element can swing the trend against your investment.

Two of the most important fundamental indicators are interest rates and international trade. Others are consumer price index, durable goods orders, producer price index, purchasing manager's index, and retail sales.

You, as an investor in forex must be aware of these indicators before investing large sum on leverage. You therefore must remember that leverage and fundamental forex trading goes hand in hand for a successful trading.

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