Leverage a Position while Day Trading in the Foreign Exchange Market

In the stock market, day traders can borrow up to three times the amount of cash and securities deposited in their accounts (although not all companies allow you to borrow the legal maximum), and this amount is determined by external regulatory organizations. In the foreign exchange market, or forex, there are no regulations on lending, and some forex companies allow traders to borrow up to 400 times the account balance.
The forex market is driven by leverage. Despite the tense reports you may hear in the financial news, exchange rates tend to move slowly, at no more than a tenth or even a hundred of a fils a day. The markets are so huge that it is easy to hedge the risk.
You may have trouble borrowing the stock you want to sell, but you will have no problem borrowing the yen. To get a great return, forex traders always borrow huge amounts of money.
Forex companies allow such huge borrowing because they can hedge their risk so that if they lose money, they make money. If you sell dollars to buy euros, for example, the company can easily go in and sell euros to buy dollars. This ability makes its position neutral. If the euro falls compared to the dollar, you lose money, but the company can compensate for the risk due to the rise in the corresponding trade.
The reason why a forex company hedges its risk against its day trading clients is that most day traders lose money. The company understands that if you bet against the aggregate deals that its customers hold, it will likely come out ahead. Don’t trade the forex or any other market until you have developed a strategy and practiced it so you can avoid becoming a statistician.

To illustrate how foreign exchange leverage can bring good returns, suppose a trader starts with a $1,000 account and borrows the maximum amount that forex companies allow, $400 for each dollar in the account.
Every 401 thousand dollars are turned into a euro purchase. Note that the value of the euro remains constant, but the dollar value of that euro changes by a hundred fils. Thanks to the leverage, the return is 11 percent – not bad for day trading! Of course, you could lose 11%, and that wouldn’t be good.
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The exchange rate is just the price of money. If the price of the dollar / euro is .7477, then 1.00 dollars will buy 0.7477 euros.