The first thing that comes in the mind of many traders when talking about forex is leverage. Forex is an online market where participants can buy, sell, exchange and trade on currencies. Before you start trading with forex it is vital to do a home study because it has some pros and cons you must to discover your own tactics that will help you trade successfully. Among the many things you should study about forex is leverage, what it is and what are the pros and cons associated with it? Here is all you need to know about leverage in forex trading.
What Is Leverage in Forex ?
Leverage is also known as margin finance, margin trading, or trading on margin is an act where an account of a Forex trader is boosted with funds. The use of borrowed funds in an investment. Brokers provide traders with many degrees of leverage starting from ratio 1:50 to as high as 1:1000. Leverage is the method forex traders acquire large amounts of money they initially didn’t have to trade with. The higher the leverage the lower the capital the smaller the funds you need to trade with. Leverage has attracted many investors in Forex as it gives the ability to fast track their potential returns.
How Leverage Works
A leverage of 1:1000 gives you the potential to trade with 50,000 dollars if you have opened with only 50 dollars. Many people with little capital are attracted to this leverage only because they want to become much wealthier in a short time. Leverage is a risk, and the higher the leverage the higher the risk. To succeed in every risk one needs to have knowledge and experience needed to handle the risk. Here are some of the pros and cons of trading with high leverage Forex brokers.
Pros of Trading with High Leverage in Forex
1. It Gives You an Opportunity to Trade with Low Capital
Previously when there was no leverage, only the wealthy people with large capital were able to make huge returns. With leverage in Forex, any trader can be able to make huge returns. Liaising with a leverage broker makes you little capital to start trading in Forex.
2. Leverage Is Interest-Free
Despite the fact that you get this funds from a Forex broker, the loan doesn’t incur any interest. If you want to start trading you can get the loan with less fear for aren’t expected to pay any interest.
3. Bigger Profits
Utilizing Leverage in your trading increases the scope of your profit. If you have 100 dollars you have a chance to trade with up to 100,000 dollars with the assistance of leveraging. Trading with big amounts increases the scope of your profit. Leveraging increases your profitability as a trader.
Cons of Trading with High Leverage in Forex
1. Heavier Losses
Working with Forex brokers increases your probability of getting higher profits but at the same time, it also paves way for heavy losses. Big profits can turn out to be smaller and small losses turn out to be bigger. Trading with higher leverage in Forex requires you to be very careful and attentive never to forget to press stop when prices move away from your predictions.
2. Leverage Is a Constant Liability
Leveraging builds an immediate liability that needs to be met by the end of the day. The principal amount of leverage must be met no matter the additional costs you have to pay or the transaction went up or down. The leverage must be paid for you to continue trading.
3. Margin Call Risk
This is an ever-present risk that you may fall under the margin requirements established by the broker. This is the transaction size you’re required to fulfill depending on your own capital. If at any point you fall below the threshold the broker may instigate a margin call which automatically liquidates your portfolio. This means that all positions that may have delivered great profits are closed early. This constant risk by your current leverage is something you should take care when managing your capital to avoid it.
Despite these disadvantages associated with leveraging you shouldn’t put off leveraging trade. It is considered a good thing in Forex trading. The pros outweigh the cons, therefore, dealing with leverage forex traders is a good idea.