Leverage in Forex Trading
Leverage trading is also known as margin trading which is a trading approach where traders borrow capital from the broker that increases the trading exposure to the forex market. The forex market is highly volatile, hence using leverage becomes risky. Because of the risks fraught with leverage trading, using leverage is mostly recommended for experienced traders.
Leverage In Forex Trading
Leverage trading increases the buying power of traders and amplifies the potential return on short or long positions. However, leverage trading is fraught with high risks and is also considered a double-edged sword, it is suggested to do your due diligence before using leverage.
Advantages of Using Leverage in Forex Trading
- Increases The Potential of The Trade: Leverage trading allows traders to open a larger position with a relatively smaller amount of money. This also increases the potential profitability of the trade as the size of the position increases.
- Helps In The Diversification of the Portfolio: With the help of leverage, one can open multiple trading positions with relatively smaller amounts without bargaining for the position size. This helps traders to diversify their trading portfolio and even hedge, mitigating the risks of heavy losses by averting traders from putting all their eggs in one basket.
- Convenience in Trading: Leverage trading allows traders to trade without using more capital and acting quickly to the potential trading opportunity.
The Disadvantage of Using Leverage In Forex Trading
- High Risks: Leverage amplifies the risk of losing as it amplifies the potential profit by increasing the exposure of the trade in the market. The losses incurred by leverage can also jeopardize the whole trading portfolio. In leverage trading, even a small fluctuation in the market price against the trade can cause significant losses. While using leverage, traders should keep a track of their performance to understand the risks involved and take measures to mitigate them.
Managing Risks While Using Leverage In Forex Trading
As discussed above leverage can amplify risks with the same intensity it can amplify potential profits. This is a greater risk itself which can be managed by considering the below points:
- Use of Strict Stop-loss: Stop-Loss is a risk management tool available on the trading platform used to close the trade automatically when the market reaches a specific level. Stop-loss is designed to limit the risk involved in trading.
- Take Profit: The forex market being highly volatile it is smart to place an order to close the position when the expected profit hits a specific amount.
- Don’t Risk More Than You Can Afford: This is one of the most important rules in forex trading. Regardless of your perfect strategy, if you can’t afford the trading amount then better avoid trading.
Some of the Good Brokers With The Maximum Leverage Offered by Them on Forex Trading Are
- Coinexx (1:500)
- LQDFx (1:500)
- Turnkey Forex (1:500)
- SimpleFx (1:500)
- ForexChief (1:1000)
- FxGiants (1:1000)
Leverage trading can be tricky to use in the beginning but as a trader learns and gains experience he finds leverage a bit comfortable to use. There are a few risk management rules that a trader has to always keep in mind while trading using leverage, but if he knows about those rules, then there won’t be any difficulty.
Do not get fascinated by the concept of using leverage. It might not require you to deposit the same amount as in a traditional form that doesn’t mean you can take higher risks. Always use strict stops and take other risk management measures to mitigate the risks.
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