Leverage

Leverage

Leveraged financing is a common practice in Forex trading, and allows traders to use credit, such as a trade purchased on margin, to maximize returns. Collateral for the loan/leverage in the margined account is provided by the initial deposit. This can create the opportunity to control USD 100,000 for as little as USD 1,000.

There are five ways private investors can trade in Forex, directly or indirectly:

• The spot market

• Forwards and futures

• Options

• Contracts for difference

• Spread betting

Please note that this book focuses on the most common way of trading in the Forex market, “Day-Trading” (related to “Spot”). Please refer to the glossary for explanations of each of the five ways investors can trade in Forex.

A spot transaction

A spot transaction is a straightforward exchange of one currency for another. The spot rate is the current market price, which is also called the “benchmark price”. Spot transactions do not require immediate settlement, or payment “on the spot”. The settlement date, or “value date” is the second business day after the “deal date” (or “trade date”) on which the transaction is agreed by the trader and market maker. The two-day period provides time to confirm the agreement and to arrange the clearing and necessary debiting and crediting of bank accounts in various international locations.

Risks

Although Forex trading can lead to very profitable results, there are substantial risks involved: exchange rate risks, interest rate risks, credit risks and event risks.

Approximately 80% of all currency transactions last a period of seven days or less, with more than 40% lasting fewer than two days. Given the extremely