Is Leverage Trading Halal? Forex Trading Explained

Leverage is a really good trading tool as well as a powerful mechanism, especially for retail investors. However, many people aren’t ready to use the above-mentioned trading tool in their trades.

We need to mention that leverage is a sensitive topic for Muslims who are interested in the forex market. It is worth noting that Muslims don’t want to violate Sharia law, and it isn’t hard to understand them. We need to find an answer to one very important question “Is leverage trading halal or haram?”

As stated, leverage is a very important topic for Muslims. According to Islam, riba (interest-based lending) isn’t acceptable; it is haram. However, leverage (especially in the case of the forex market) certainly operates as a loan. Interestingly, it operates as a loan even if there is no specific “involve” confusing many people who practice Islam that would otherwise want to join the forex market.

As you can see, the situation is quite complicated. We can say that leverage trading is halal and haram at the same time. You need to remember that leverage is a loan for a broker, which wouldn’t be considered as riba. Nevertheless, if the leverage allows for a gambling mentality, then it is unacceptable.

People who aren’t familiar with the topic might ask, “Is leverage trading in forex haram?”

For instance, when you receive leverage from a broker, you are basically getting a “loan” from the brokerage you are working with, with the purpose of investing the money that you got from the brokerage – and there is no interest attached.

The above-mentioned loan you are getting from your broker wouldn’t be regarded as riba.

Leverage trading and Islam

As you can see, the situation is more complicated than it might have appeared at first glance. So, is leverage in forex halal or haram? Maybe it is haram, maybe it isn’t haram.

It is up to every person to decide whether leverage in forex is halal or haram.

We need to mention one very important topic. Is forex trading halal or haram? As in the case of leverage trading, there is no right or wrong answer.

Is it possible to trade forex without leverage?

It is no secret that forex trading is very popular all over the world. Interestingly, compared to other classic forms of investing, like real estate and stocks, forex has the lowest barrier of entry.

Importantly,  it is possible to trade forex without leverage. However, you need to remember that in order to trade forex without leverage, you would need a huge amount of capital in your trading account. and as a reminder, institutional traders are without leverage on a daily basis. However, the situation is completely different when it comes to retail investors. They can’t survive without profits of less than 1% per month. That’s why leverage is needed.

As stated above, a retail investor can trade forex without leverage; however, it isn’t worth doing. We need to mention that leverage is potentially quite dangerous. Nevertheless, if you want to trade without leverage, you would need millions in trading capital in order to make any noticeable returns.

However, the vast majority of traders simply can’t afford to trade forex without leverage. They only have several hundred or several thousand dollars. So, they don’t have enough money in order to avoid leverage in forex.

To put it mildly, brokers offer leverage to customers because leverage is needed. So, if no one needed it, brokers would stop offering leverage to traders. As you already know, leverage is very dangerous. However, without leverage, you would never be able to compound a trading account to the size needed in order to make forex trading your primary source of income.

Let’s get back to the question “is it possible to trade forex without leverage?” Yes, it is possible to avoid leverage in forex. Nevertheless, it isn’t worth doing.

What are you supposed to do?

You might be surprised to learn that leverage itself is absolutely fine to utilize as long as the investment instrument doesn’t violate Sharia law.

Unsurprisingly, you have to avoid trading that involves any swap fees. You must only use forex brokerage accounts that take into account the Islamic faith.

Don’t worry; it isn’t hard to find such accounts. As a reminder, all major brokers offer an “Islamic account.” As you can see, there is no need to go against your faith in order to join the forex market and as a standard procedure, it makes sense to leave any leverage you end up taking to as small an amount as possible.

Furthermore, it is vital to capitalize on this leverage through Islamic accounts only (accounts that don’t have standard interest payments attached). In most cases, Islamic accounts charge somewhat higher commissions for spot forex trades. Don’t worry; it is fine to charge somewhat higher commissions.

Moreover, it makes sense to make sure that you trade “hand-in-hand.” Why? Because this kind of trading fully adheres to the teachings of the prophet Muhammed.

The role of Islamic faith leaders

We also need to mention that stop and limit orders may be unacceptable and interfere with the “hand-in-hand” trades. However, the best thing to do is discuss the above-mentioned topics with Islamic faith leaders in order to learn how Islam views stop and limit orders.

You need to remember that the answer to “leverage in forex in halal or haram” is a little more complex than many people might think it is.

People have different opinions about whether leverage trading is halal or not. Unsurprisingly, there are many conflicting voices in the Islamic community regarding leverage. Moreover, some people think forex is haram, while others think there is nothing wrong with forex.

It is desirable to discuss topics regarding forex with local leaders as well as financial experts. They have the knowledge and experience to help people who are interested in the forex market.