In Forex, the concept of leverage refers to the situation where a trader borrows the money of the Forex brokerage firm and uses that money specifically for trading in the Forex market. Because of leveraging, a trader with just a small capital outlay is able to invest in significantly larger value contracts.
As a Forex trader you have the option of relying on Fundamental Analysis or Technical Analysis. Nevertheless, there is no single formula that will serve its purpose in a fluid environment like the Forex market.
In any Forex trade, there are two rates that are applicable depending if the trader is buying or selling a currency pair. If he is selling a currency pair, he will request for the “Bid” price of the currency pair. Conversely, if he is buying a currency pair, he will then look at the “Ask” price of the currency pair. The Ask price will always be higher than the Bid price.
Before a trader can use leveraging, he/she has to put a margin. The margin is a deposit of good faith also called the performance bond. When the forex trader fulfills the margin requirement of the brokerage firm, he can place an order larger than what he has in his trading account. In the event of the funds in the trading account fall below the margin requirement, the broker will close some or all of the trader’s market positions to make up for the shortfall.
In each country whose currency is traded in the Forex market, the Central Bank of the respective country will determine the overnight lending rate the commercial banks. The control of interest rate is essential for the central bank of a country to implement its monetary policies. Hence, the interest rate is used as a tool to expand or contract the money supply. Generally, a lower interest rate will cause a country ’s currency to depreciate.