Leverage in general means one’s capacity to utilize something small to control something huge. Forex leverage, on the other hand, is a tool used in Forex trading and indicates that you can control a bigger amount in the market with only a small capital or a much smaller deposit. Among the most favored aspects of Forex trading is the idea of leverage. For example, if a brokerage company in this industry offers a 60:2, leverage this indicates that for every two dollars in an investor’s account, he may be allowed to trade sixty dollars on the trading market.
Advantages of leverage for the trader
With this, a trader can do bigger trades that may not be possible without leverage. This can result to immense returns for the investor’s account. For instance, your trading account contains a thousand dollars. You can plan on placing a thousand dollar trade on the Forex market. More or less, the pip value is going to be ten cents. Once the trade shows great potential moving for 10 pips, you can gain a dollar or 0.1 percent profit.
If you plan on using a leverage of 10:1 in that particular trade, you will have a thousand dollars in your trading account; however, the trade value is equivalent to ten thousand dollars. On this level of trading, the estimated value of pip is a dollar for every pip. Hence, a 10 pip movement will provide a ten dollar profit or a 1 percent return. Contrastingly, frequently the use of leverage is disregarded due to the fact that it is capable of being either a setback or an advantage. Forex trading with leverage raises your gains as well as your losses.
Leverage provides options
The major advantage of leverage is its capability to present choices. It the market becomes unpredictable, leverage is less recommended if the markets are not moving fast, more leverage may be used. Everything is contingent on the extent of risk management you are willing to make use of. The decision to use leverage is actually dependent on the decision of the trader.
On the whole, it is imperative to make careful use of leverage in this realm of trading. Forex brokers offer traders leverage merely for the reason that this increases the broker’s bottom line whether the trader gains or loses. Most Forex traders are not successful in this regard and too much use of leverage is among the causes of their failure.
Content participants: Johni from Admiral Markets Australia and Agbulos from MTrading philippines Participated in this post.
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