What is leverage in forex
Leverage in forex is the use of borrowed capital the broker loaned the trader, to invest in currency, stock or security, with is added to the capital he or she initially deposited. This is expressed in the form of ratio. Leverage can as 1:10, 1:20, 1:50 or 1:100. Many people believe that leverage is a way to earn more money. Leverage is a good tool to trade with but if used correctly, leverage can help you to increase your trading profit. If you use leverage the wrong way, it can wipe out your account balance.
There are still some things you should know about leverage before using it. One the most important thing traders fail to understand is that the higher the leverage, the higher the risk is going to be on your account. Therefore, traders who just started out must choose the correct leverage until they have more experience, they can use a higher leverage.
Although trading the Forex market without leverage can minimize the risks of blowing up your account. To understand more about Forex trading with and without leverage, keep reading this post for more insight.
How leverage works
If you have a 100000 US as your initial capital and your trading with a leverage of 1:20, which is recommended for beginners. According to your leverage, your trading capital has increased 20 times your initial capital. That means you have (100000 × 20) 2,000,000 to trade with. Now let say you go you want to go long on the CAD/USD pair at 1.5400 and the trade when up 1.5500, you will be in a winning position.(1.5500 -1.5400)×2,000,000 = 20000, will be you profit.
On the other hand, you are trading the same pair, at 1.5500 and the trade close at 1.5400, you will lose the trade.(1.5400-1.5500)× 2,000,000 = -20000. You will lose 20000 from your capital, which leaves you at 80000.
Trading without leverage
Trading without leverage has its advantage and disadvantage in the market. Trading without leverage is possible. However, trading currencies without leverage is not an easy job. It will take lot of time, money, and experience if you want any type of profit from this market. One of the main benefit of trading without leverage on the Forex market is that it limits your losses. If your inital capital falls, you will only lose the money that you have invested and not the money that you have borrowed. This type of trading is therefore much less risky than trading on margin.
Trading without leverage also forces you to be more disciplined with your trades and take less risk.
You would be more careful with your trades because you don’t want to lose all your money. If you lose money it’s only the money you invest you will lose. However, if you trade with leverage and lose money, you are required to pay back the loan plus interest.
If an investor trades instruments on CFD, oil & metals, can trade without margin and earn significant amount of profit. Because the cost of minimum lots is lower than foreign exchange markets and the volatility is higher.
Understanding leverage
It’s important to understand leverage when trading forex. When you use leverage, you are borrowing money from a broker to increase your investment. This increases your potential profit, but also increases your risk.
For example, if you deposit $50000 and use 1:20 leverage. You have 1,000,000 buying power. But you must only risk 2% of your capital. When using leverage you must almost use other factors in your trading, when using leverage.
Many professionals will use leverage like 10:1 or 20:1. It’s possible to trade with that type of leverage, regardless of what your broker offers you. The key is deposit more money and make fewer trades, never over use leverage.
I don’t want to make a long blog post about leverage and confused you, so here are some tips when using leverage
5 Tips to Use Leverage in Forex Trading
1. Understanding leverage and how to use it.
2. Using proper risk management is key.
3. Trading with an algorithm or proven system.
4. Never over trade.
5. Always use a stop loss.
Concluding
No matter what’s your style, always remember that just because the leverage is there, it does not mean you have to use it. The less leverage you use, the better. It takes experience to really know when to use leverage and when not to.
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