Leverage involves controlling a large sum of money using a small sum of your money and then borrowing the required money from the brokers. Forex Trading initially offers high Leverage so that the trader can control a large sum of money.
In Forex Markets, Leverage can be high as 100:1 in Forex Markets which means that you can trade up to $100,000 if you have $1000 in your account. Leverage is like a double-edged sword, meaning the chances and magnitude of profits and losses using high Leverage are the same.
Five Things you should know about Leverage
- Financial Leverage
Leverage works in the same fashion as borrowing money to buy stock in the forex. Online brokers increase Leverage to their customers who have small sums of money in their accounts. The customer’s deposit often secures this Leverage or virtual credit, and it lets them trade in multiple monetary possessions.
- Leverage and Margin
Leverage and margin are necessary to know in the forex. Margin is the sum of money a trader must have to use the Leverage. Margin is measured in percentages as if a broker has a 2% margin requirement, and his Leverage is 1:5. If a trader has $1,000 and uses a leverage of 1:5, the trader can purchase assets worth $5,000.
- Leverage strengths
There are three advantages of using Leverage.
- Firstly, it can enable a trader to make the most profits in each trade.
- Secondly, a Leverage trader with inadequate resources can trade even inexpensive assets such as Bitcoin and gold. It would not be possible without Leverage, and it would not be feasible for a $1,000 account to trade in gold.
- Using a suitable Leverage size is crucial in deciding a trader’s success. Suppose a trade goes big, then a trader with high Leverage can make more money than a trader with low Leverage.
Suppose a trader has $1,000 in the account and decides to sell the USD/JPY pair trading at 110. And his account has a leverage of 50, and the broker margin deposit is 1%. Also, consider that the standard lot is worth $5, and for five standard lots, the worth is $25.
- Handling leverage risk
Hence, it is understood that a higher leverage ratio implies a higher profit if the trade goes right. If the trade moves against you, your loss is more than a trader with low Leverage.
It is always fascinating for new traders who frequently overvalue the positive aspect of this feature. They apply high Leverage to their trades, and it does not go well most of the time.
Contrarily professional traders are well aware of the risks of high Leverage, and they often use low Leverage and make smaller profits which is necessary for the long run.
- Leverage during Market Swings
Experienced brokers trade at low Leverage when significant market swings are expected, such as during major elections and chief economic data releases.
Leverage has two ends; a highly leveraged trader makes considerable profits if trades go well. When they move against you, the losses can be massive as well. The secret to success is to find a good balance of Leverage. Go and complete your globex360 registration to get fruitful assistance if you are a beginner. Beginners should always understand the meaning of Leverage and margin, and they must trade with the minimum available Leverage.