Forex Trading – Understand Leverage

The forex market lets you trade with leverage. Many brokers give you leverage that is as high as 500:1. This is highly beneficial because even if you have a very small trading amount the leverage lets you take huge trades and thus multiply your capital. However, this also comes with some added risks. The promise of letting you make excess gains works the other way round too. Leverage also increases the losses by multiplying it. Most professional Forex market traders will point towards the dangers of trading in an account that is over-leveraged. This is a mistake that traders make since trading with leverage can wipe out your entire capital in a single trade.

What is the leverage?
What is the trading leverage? When you trade using leverage, then this means that you need a small capital amount to take a large position in the market. So suppose that your broker gives you a 100: 1 leverage then this means that you would need only $1 to take a trading position worth $100.

The brokers try to lure traders with these offers that looks highly lucrative. This tempts the trade because they see this as a jackpot where they will be able to make huge returns on their capital. However, it is important to know that nothing comes for free and that if the leverage offers huge gains it also multiplies your losses. Most new traders do not focus on the risks of trading with leverage and this is what leads to huge losses and depletes their trading account.

Should one trade with leverage?

Is leverage completely bad for your trading account? Read review on this. No, it is not! However, you should know how to trade with leverage. It is a bonus since you do not have to keep a lot of money in your account to place trades now. But when you trade with leverage it is equally important that you focus on the risk before you see the reward.

If you have proper risk management in place and use proper stop loss techniques, then trading with leverage is highly beneficial. Leverage is only dangerous for those who are greedy in the market and come trading only with their gut feelings without any trading strategy or risk management in place in the hope that they would return rich. Unfortunately, for them, it does not take time for the market to take away all their money.