Forex: Leverage and Its Advantage

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bsadamsmithgmailcom
Join date: 2016.01.07
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#1

In general terms, “leverage” means borrowed funds. Leverage is mainly put to use while acquiring assets. Leverage is also used in trade markets to trade financial assets. Forex market also uses leverage to magnify the earnings from forex trading.

Retail investment in forex market has grown in recent years due to rapid increase in online trading platforms and online banking. Forex market operates online these days. As forex market is profitable, everyone wants to invest in the forex market. Profits in forex market are maximised due to the high degrees of leverage applied.

For example, a trader is trading a currency pair and the leverage allowed by his or her forex broker is 50:1. Therefore, a trader investing $1 can trade $50 due to leverage provided by the broker. There are factors like commissions, interest and other charges involved; that a trader has to keep in mind while using leverage. Leverage is provided on the margin one puts in the trading account that one creates with the forex broker. Margin is a collateral or equity in trading account.

Leverage benefits

Leverage allows a trader to enhance his or her profit. In forex market, brokers lend capital to a trader. This allows a trader to open a larger position in the market. Leverage helps traders to increase their return on investment. Traders can utilise the chances to earn huge profits when the market flow is favourable by using leverage.

Margin

A trader has to open a trading account with a forex broker, to trade in forex market. A trader has to put up a fixed amount of capital as security, in order to borrow capital. This fixed amount of capital is called margin. A minimum amount in trading balance ensures that a trader’s loss does not exceed the amount in the minimum balance in account. The minimum amount of balance may vary depending on the broker a trader chooses.

Tips to use leverage

There can be different leverage ratios that can be applied. Leverage can help in generating huge profit but the forex market is dynamic. Therefore, forex market can cause huge losses if traders are not careful while trading. Leverage can maximise the losses as well. Traders are always tempted to use high degree of leverage but they must follow few tips when they are using leverage.

Cap losses

A trader must know how to cap their losses while using leverage. This helps them to maximise profits and minimise losses. A successful trader caps losses within manageable limits. A successful trader never lets losses go out of hand when using leverage.

Strategic stop

When a trader is trading in forex market, using strategic stops is very important. Forex market operates for 24hours a day and changes drastically. A trader may close his or her trade and may find that his or her position has been affected by a move of pips. If the trader has used leverage and the move of pips has affected the trader adversely then the losses occurred can be catastrophic. A trader must use strategic stops to cap the losses and to protect profits.

Appropriate leverage

A trader must make sure that they use leverage cautiously. Leverage one uses must be appropriate to a trader’s comfort and risk taking capacity. Traders must avoid to get carried away while trading in forex market. Sometimes traders double the trade in what seems to be a favourable market flow, to recover losses. This doubles the loss. A trader must avoid getting impulsive.
INDIA
Join date: 2016.05.13
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#2
bsadamsmithgmailcom:

In general terms, “leverage” means borrowed funds. Leverage is mainly put to use while acquiring assets. Leverage is also used in trade markets to trade financial assets. Forex market also uses leverage to magnify the earnings from forex trading.

Retail investment in forex market has grown in recent years due to rapid increase in online trading platforms and online banking. Forex market operates online these days. As forex market is profitable, everyone wants to invest in the forex market. Profits in forex market are maximised due to the high degrees of leverage applied.

For example, a trader is trading a currency pair and the leverage allowed by his or her forex broker is 50:1. Therefore, a trader investing $1 can trade $50 due to leverage provided by the broker. There are factors like commissions, interest and other charges involved; that a trader has to keep in mind while using leverage. Leverage is provided on the margin one puts in the trading account that one creates with the forex broker. Margin is a collateral or equity in trading account.

Leverage benefits

Leverage allows a trader to enhance his or her profit. In forex market, brokers lend capital to a trader. This allows a trader to open a larger position in the market. Leverage helps traders to increase their return on investment. Traders can utilise the chances to earn huge profits when the market flow is favourable by using leverage.

Margin

A trader has to open a trading account with a forex broker, to trade in forex market. A trader has to put up a fixed amount of capital as security, in order to borrow capital. This fixed amount of capital is called margin. A minimum amount in trading balance ensures that a trader’s loss does not exceed the amount in the minimum balance in account. The minimum amount of balance may vary depending on the broker a trader chooses.

Tips to use leverage

There can be different leverage ratios that can be applied. Leverage can help in generating huge profit but the forex market is dynamic. Therefore, forex market can cause huge losses if traders are not careful while trading. Leverage can maximise the losses as well. Traders are always tempted to use high degree of leverage but they must follow few tips when they are using leverage.

Cap losses

A trader must know how to cap their losses while using leverage. This helps them to maximise profits and minimise losses. A successful trader caps losses within manageable limits. A successful trader never lets losses go out of hand when using leverage.

Strategic stop

When a trader is trading in forex market, using strategic stops is very important. Forex market operates for 24hours a day and changes drastically. A trader may close his or her trade and may find that his or her position has been affected by a move of pips. If the trader has used leverage and the move of pips has affected the trader adversely then the losses occurred can be catastrophic. A trader must use strategic stops to cap the losses and to protect profits.

Appropriate leverage

A trader must make sure that they use leverage cautiously. Leverage one uses must be appropriate to a trader’s comfort and risk taking capacity. Traders must avoid to get carried away while trading in forex market. Sometimes traders double the trade in what seems to be a favourable market flow, to recover losses. This doubles the loss. A trader must avoid getting impulsive.

Thanks a lot for this Valuable information's this really helps a lot.

bonifaas_abe
Join date: 2016.02.17
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#3
There are good advises here, higher leverage certainly gives traders a great opportunity to maximize their profitability even with a small initial investment. It can greatly enhance your chances to make substantial profits but at the same time it could wipe out completely your margin.
LazarR
Join date: 2016.02.12
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#4
I do agree with the comment above that the leverage could wipe out your margin. But in other hand it gives you the advantage to control a large amount of money using none or very little of your own money and borrowing the rest.
FrancoisT
Join date: 2016.02.12
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#5
Greetings,
I just want to add - if you are aware of what you are doing, the level of leverage does not make any difference
krelian99
Join date: 2014.10.25
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#6
FrancoisT:
Greetings,
I just want to add - if you are aware of what you are doing, the level of leverage does not make any difference
But fewest actually know what they do. To know and to think one knows are two completely different things. A leverage of 50:1 is good. Higher than 100:1 is too risky and money maker brokers know that and let run newbies into the knife on purpose. Many professional retail traders have 20:1 or 50:1, and if one wants to survive in FX you better move in this direction than higher. 1000:1 or 2000:1 is such a deep red flag, avoid such brokers as they have the plague.
bonifaas_abe
Join date: 2016.02.17
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#7
krelian99:
But fewest actually know what they do. To know and to think one knows are two completely different things. A leverage of 50:1 is good. Higher than 100:1 is too risky and money maker brokers know that and let run newbies into the knife on purpose. Many professional retail traders have 20:1 or 50:1, and if one wants to survive in FX you better move in this direction than higher. 1000:1 or 2000:1 is such a deep red flag, avoid such brokers as they have the plague.
I agree with you Krelian99,
There are not so many traders who are really aware of what they do. Higher leverage is a serious disadvantage to amateurs, however most of the new traders go for the highest leverage, above 1:500 as they are attracted to the possibility to multiply their funds and get excessive profits. But unfortunately they often get burned.
FrancoisT
Join date: 2016.02.12
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#8
krelian99:
But fewest actually know what they do. To know and to think one knows are two completely different things. A leverage of 50:1 is good. Higher than 100:1 is too risky and money maker brokers know that and let run newbies into the knife on purpose. Many professional retail traders have 20:1 or 50:1, and if one wants to survive in FX you better move in this direction than higher. 1000:1 or 2000:1 is such a deep red flag, avoid such brokers as they have the plague.

Greeting,
That is why I said "if you are aware of what you are doing" :)
This means that you have complete control over your account and over what maximum risk you may take per trade. I agree many traders does not know how to protect their funds, because they cannot accept the loss and they become "donors" for MM.
Also you never hold solid amount if you know that particular broker is MM and offer "great conditions" - (but on other hand, some of them trying to offer better quotes or smooth pricing via aggregating few different flows and may offer great opportunities for latency arbitrage events via EA's).
Bottom line: if you know what you do, whether your leverage is 1000:1 or 500:1 you never exceed your max. accepted loss and keeps your account under control :)

rafee
Join date: 2017.01.22
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#9

Leverage is the part of the forex currency trading operation which is substantial. It can help you to get started with a lot of money but you actually don’t have the money. The leverage is provided by your broker. Forex leverage is used to increase returns on investment but risk is associated with using it in the forex trading market.

ivanandrej25
Join date: 2017.02.14
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#10
rafee:

Leverage is the part of the forex currency trading operation which is substantial. It can help you to get started with a lot of money but you actually don’t have the money. The leverage is provided by your broker. Forex leverage is used to increase returns on investment but risk is associated with using it in the forex trading market.

i totally agree with you. not everything is all smooth sailing. just like everything, leverage comes with its own risks and is not for all investors