By Admiral Markets
Have you imagined how you can legitimately transform a thousand dollars into a hundred thousand dollars? Try the forex market and use leverage to earn ninety nine-fold profit. If you play in the forex realm, leverage could be one of your most potent weapons to score victory after victory in your conquest for big bucks. Of course, when there’s an up, there’s always a down and leverage can also be a real danger to your account, so proceed with caution.
Mechanics of Forex Leverage
Leverage allows a trader to use an amount of money, which he technically borrows from a broker, to raise a far larger amount. The trader is able to do this using his initial amount of money, the margin, to leverage a much larger investment. Wise use of leverage can make even a small investor command large positions in the forex market within a short time. At the same time, this characteristic can also be responsible for staggering loses.
Traders should intelligently control the use of this very powerful weapon. Particularly, newbies in the forex market should not get too excited about scoring big and make the blunder of over-leveraging. It takes only a small position on the right side to make some significant returns and vice versa. Volatility too should not be taken out of the formula. Before making that big plunge and increasing leverage, traders should peruse on their entire risk capital and their trading strategy.
The leverage offered by different brokers is typically quoted as a ratio of X:1, where X is the value of the position and 1 is the margin for the position. A leverage of 100:1 is a very high leverage. This leverage means the trader controls 100 times the margin amount. If your margin is $1000, then you control $100,000 for a particular position.
Some Points to Remember
A basic rule of thumb is that anything less than 50:1 is low leverage. New traders should get a feel and understanding of the power of leverage in the forex market before venturing into high leverage positions. A typical way to start is using 10:1 and increase in increments of 10:1 units as one gets the hang of it. Traders usually know the signs because they gain confidence.
When using leverage, keep the following in mind:
Understanding and management of leverage separates the future winners from habitual losers.
Permitted leverage in forex varies with the place and time.
The higher the leverage or the lower the margin, the greater will be the profit or loss for every 1% price movement. Likewise, the greater reward or risk, respectively.
A trader’s margin deposit is NOT his maximum possible loss. Instead, maximum loss is dependent on where the trader set the stop loss order.
Never trade without enough cash. If a trader runs out of cash, he can not keep his position, regardless of whether the position is gaining or losing.
Playing in the forex market can be a lucrative engagement. However, be very wary of volatility and fluctuations and always be ready for surprises. Remember, demo accounts are a great way to practice your trading strategies and get your feet wet, but demos are far different from the real thing. It is a different feeling entirely when losing real cash. Never immerse yourself in real money trading without the proper training and planning. Furthermore, look to build your trading experience and confidence always before upping your leverage.
Content Source, www.admiralmarkets.ph
