Leverage draws a great deal of people to trading Forex. A simple Google search will bring many results about leverage. This can make it appear as though leverage is the main factor most beginner traders consider before they start trading Forex. Before you delve deeply into leverage, you should consider that your trading strategies are key in your success or failure as a forex trader and it is always beneficial to get trading ideas by subscribing to a forex trading signals provider as it surely makes an impact on your trading knowledge and the way you trade. Let’s proceed!
What is Leverage?
Do you know what leverage as applied to forex means? If not, here’s a concise summary:
Leverage can be likened to a credit given to a trader. it enables traders to control trading accounts with funds that are fundamentally larger than their capital. It is normally conceivable to utilize leverage to trade stocks, indices and commodities, however it is becoming increasingly available in forex trading too. Leverage possibly causes traders to accomplish higher profitability in the market and obviously, the same likewise applies to losses. Traders are always at risk of losing their funds more quickly when using leverage – so use it carefully!
A Financial Leverage Example
Imagine that a trader has an account of 10,000 USD. The trader’s broker offers a leverage of 100:1 for a deposit of this size. Knowing these two qualities, we can easily calculate the biggest position accessible to this trader. We simply have to multiply the trader’s deposited amount by the leverage rate. (for example 10,000 multiplied by 100). Therefore, this trader will be able to control an account with 1,000,000 USD in value.
Forex Trading With Leverage
So now you already know what leverage means, but do you know exactly what it means in forex and how it can be applied in forex trading?
The greatest advantage of leverage is that it enables traders to control large account sizes even when they don’t have considerable capital. Traders more often than not consider 1,000 USD to be an average beginning amount. In any case, not all traders can manage this sum – particularly when they are just beginning. What’s more, this is the place financial leverage becomes possibly the most important factor.
How does Forex leverage work precisely? We should think about a case of trading with no leverage to address that question:
Suppose you buy 1000 USD for 800 EUR, and afterward the cost of USD drops by half. You would just lose half of your investment (in this specific example, you would lose 400 EUR). However, If you had used 100:1 leverage, and the price changed by even just 1%, you would have lost most of your investment.
Forex Trading Without Leverage
The primary drawback of trading Forex without leverage is that it is basically not open for all traders. Trading forex without leverage implies that changes in the price of a currency you trade will only straightforwardly impact your account.
However, your return will be small. Without leverage you would most likely just make between 0.3 to 0.5% every month if you are working with a solid trading strategy or use reliable Forex trading signals service.
What is institutional trading? As we’ve noted, a ton of institutions trade forex without using leverage. Those institutions that trade without leverage do not usually achieve great gains unless they have huge trading funds available to them. Clearly this is not the case with big banks since they trade with billions in capital. There are organizations that regularly trade for long haul, therfore they do not trade at all like the regular traders. Institutions can keep their positions open for a considerable length of time or even years.
To Leverage or Not to Leverage
That is the issue!!
There’s no definite answer to it – it depends on the circumstance. You need to consider your trading strategy, your money-related focuses, the capital available to you, and the amount you can afford to lose. Like any financial market, the Forex market is not without its risks. And the higher your leverage is, the less secure your positions get.
By now you should have a complete picture of the pros and cons of using leverage in forex trading and how you have to proceed with it. It is pivotal to deliberately make your choice of trading strategy considering your deposited amount, how much you are willing to lose, and how much you are willing to make – before you start leveraged trading. Certain trading strategies, coaches or forex trading signals providers may encourage or discourage the use of high leverage in forex trading, but traders can earn profits in both scenarios if they know what they are doing.