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.

Unsurprisingly, many questions about the Forex market and Islam exist, such as “Is Forex trading haram?” “Is trading haram is Islam?” and the list goes on.

We need to mention that leverage is a sensitive topic for Muslims 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 simultaneously. It would help if you remembered 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.

Is Forex trading haram?

As mentioned above, there is no lack of questions about the Forex market and Islam. So, “Is Forex Trading haram? Let’s find out!

Whether forex trading is considered “haram” or forbidden in Islam is a matter of debate and interpretation within the Islamic community. There is no one-size-fits-all answer, as opinions on this issue vary among Islamic scholars and practitioners.

The key concern with Forex trading in Islam is the element of uncertainty (gharar) and the potential for engaging in speculative activities, which are generally discouraged in Islamic finance.

Here are some of the main arguments on both sides of the debate:

Proponents of Forex trading:

Economic activity: Some argue that forex trading, when conducted as a legitimate economic activity involving real assets and contracts, is permissible in Islam as it can contribute to economic growth and stability.

Hedging: Forex markets can also be used for hedging purposes, reducing financial risk by using derivatives. Hedging is considered a legitimate practice to protect investments in Islamic finance.

Opponents of Forex trading:

Speculation: Critics argue that most forex trading is speculative in nature, involving high leverage and short-term positions, which are akin to gambling. Islam strictly prohibits gambling (maysir) and any activity that resembles it.

Interest (riba): Some forms of forex trading involve the payment or receipt of interest, which Islam prohibits. This is often associated with swap or rollover rates in currency trading.

Ultimately, whether forex trading is considered haram or halal in Islam can vary depending on one’s interpretation and adherence to Islamic finance principles. It is advisable for individuals to seek guidance from qualified scholars and financial experts to make informed decisions that align with their religious beliefs.

Leverage trading and Islam

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.

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, it would be best if you remembered 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 return 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 is 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 Forex topics with local leaders and financial experts. They have the knowledge and experience to help people interested in the Forex market.