One of the most important parts of Forex trading is Leverage. If you’re a new trader, a question you must start asking, “what is leverage”. In this blog, we’ll overview what is leverage and a summary of how leverage can kill your Forex account.
What is Leverage?
Leverage is a form of virtual credit, which allows us to negotiate in the market with the money of the broker. Most traders do not have 10k to get started with forex trading. Forex brokers offer leverage as a way to make the market accessible to the average trader.
Using Leverage as a Tool
The dangers of using too much leverage are rarely talked about but are pretty obvious if you think about it. This doesn’t mean that you have to use the full amount of leverage just because it’s there. In fact, there are ways to use leverage in useful ways that will give you an advantage.
A good time to use leverage is when adding to a winning trade. If you have a trade that has progressed favorably and you want to add to it, this is a good use of leverage. This is called leveraging your profits.
Overall the best use of leverage is when position trading. It’s tempting to use extreme leverage to make a fast profit on single trades, but the risks are just not worth it. This is especially true given that the future is uncertain.
Professionals leverage traders prefer to trade on 100:1, in the forex market this means that with $500 you can have control over for $50K is the most voted leverage value. This is not it if you are playing at this value you should have this thing in your mind that you might lose $40K as well.
Leverage can be a sharp double-edged sword. It can work for you, or against you. Leverage can be very dangerous if used improperly. Brokers can offer heavy leverage, but that does not mean that you are forced to use it all the time.
Most traders do not have big capital to start trading and they use leverage to take trades without understanding how it works and blow off their account.
While looking for a broker, you will discover that there are brokers out there that offer extreme leverage. Some brokers will even offer you 400:1 leverage. This would allow you to open an account with $300, and use that same amount to control up to 120k worth of trades. The average pip size with a trade of 120k is $12.00. If your trade lost 25 pips, your entire account would be wiped out. Considering that most currency pairs can move 25 pips in less than 10 seconds, that sounds pretty dangerous, doesn’t it?
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