Leverage in forex trading means you are borrowing money from the forex broker to carry out a larger transaction than what your current account has. For instance, you only have $1,000 in your forex account, and you would like to make a trade in certain currency pairs in the amount of $5,000 because you see a bigger profit potential when you put a bigger investment in it. Then, you will need to use leverage as offered by the forex broker to maximize your profit potential for this transaction.
The leverage in forex trading will have its own risks if you are using it with carelessness. However, you can use leverage to your advantage if you are already an experienced trader, and you would like to maximize your profit potential by putting in your investment in certain profitable trades. Also, it’s worth mentioning that forex brokers will only provide leverage for the traders that they already trust, so the leverage option might not be available for you if you are still a beginner in forex trading.
Leverage – Use It at Your Own Risk
Taking up the leverage offer in the forex trading market can be a good way for experienced forex traders to maximize their profit potential. By taking the leverage offer from the forex broker platform, you are borrowing money from them for a short period, making a quick profit from your bigger forex transactions, and then returning your borrowed money to the forex broker platform with some interests. Yes, it might sound good, but you need to use this feature at your own risk.
Forex trading platforms will allow you to take the highest amount of leverage when compared to any other trading platforms, such as stocks and cryptocurrencies. With forex, you can take up to a hundred times your initial investment as a leverage. So, for instance, you can take the leverage of up to $200,000 for your $2,000 investment in your forex account. This will translate into massive profits for you, and this can also translate into massive losses for you. Be sure to weigh the benefits and disadvantages before taking any leverage offer from the forex broker platform to minimize your risks.
Tips to Take Advantage of Leverage in Forex Trading
Most forex trading platforms will allow their traders to take the leverage offer for up to 100:1 ratio. However, there are many leverage options you can choose to help manage your risks while keeping your profit potential high. Don’t fall for unrealistic leverage offers from your forex broker. Here are some tips to take advantage of leverage in forex trading:
- Choose a low leverage level to maintain low risks in your investment. No matter how skilled you are in forex trading, it’s best for you to choose a low leverage level to keep your risks at a minimum. You should take at most 10:1 leverage instead of going on full force with the 100:1 leverage. It’s best to use the leverage to get some small wins and do that many times rather than aiming for one massive win that you will do only once.
- Don’t use any leverage when you are in doubt. Take the leverage only when you are sure your investment will become a profit. Don’t take the leverage, no matter how small, if you are unsure about your investment profitability.
- Ensure you have at least 80% certainty in your profit potential when taking a leverage. A skilled forex trader can see a profit potential right when it comes up. Be sure to take the leverage offer only when you are sure that the profit potential is at least 80%. Also, take the leverage offer only when you can expect a quick turnaround in your profit.
- Always take the leverage when you can cover it with your available funds. Last but not least, don’t take any leverage offer if you can’t cover the amount of leverage with your available funds. Only trade with the money you own, even when you are trading with leverage. This way, you can minimize your risks and avoid incurring any debts because of your wrong calculations in your forex trading activities.
Important Points to Keep in Mind when Using Leverage in Forex Trading
You can use leverage in the forex trading market and add it to your primary investment, which can give you a boost in your potential profit. However, don’t see this leverage opportunity as free money you can use in the forex trading market. Many new traders fall into the trap of using leverage as a kind of free money, which causes them to lose in a big way. Here are some important points to keep in mind when using leverage in forex trading:
- Manage your risk well. With leverage, you are using someone else’s money in your forex trading activities, so you need to manage your risk well when you are choosing this option. Don’t get your hopes up and don’t create any unrealistic profit expectations with the leverage you are using in the forex trading market.
- Start with 1:1 leverage. Don’t go for the high level of leverage if you are still quite new in forex trading. You can start with the 1:1 leverage and then continue your way to the higher levels. However, it’s best for you to stop at 10:1 leverage level to minimize your risk in your forex trading activities.
- Learn when to stop. Leverage is not for everyone. You need to learn when to stop taking any leverage in your forex trading activities. You shouldn’t use this feature if you are not ready to deal with all the consequences when you lose. So, it’s best for you to stop before you lose more money in the forex trading market if you think that using leverage doesn’t work for you.
You have learned about leverage in forex and how you can take advantage of it. Leverage is a feature that any forex trader should use if they are sure that they can maximize their profits in their currency pair transactions. The feature is there to help forex traders earn more money in their transactions, so it’s not something that you can use just for experimentation or guesswork in your forex trading activities. You need to use the leverage feature only when it is beneficial to you. Good luck!