Beauty Of Leverage For Forex Traders
Early in my Forex journey, I had no idea that these forms of trading existed. I didn’t even know there were types! Imagine that – wanting to be a trader but not knowing the different approaches I could have taken! Laughable right?!
I laugh now, looking back, but it wasn’t a joke at the time because all I wanted was the money. I had zero direction, zero-knowledge, and so much ignorance towards what it took to be an exceptional trader.
Is it possible to be to every type of trader out there? I HIGHLY doubt that, because each class has their attributes and skillset that is unique to them.
There’s a certain depth within each trading style one needs to acquaint themselves with before knowing everything required to be profitable.
Today we will be looking at leverage and what ratio best suits your trading style.
How beautiful can leverage be?
Let us not get excited by the brokers that offer insanely high leverages before we understand ourselves as traders and understand the difference in pip values of all the pairs, indices, and commodities you trade.
How beautiful is it to use leverage? Let’s look at it from a scalper’s perspective for a second. A scalper looks to enter multiple positions on a lower timeframe (possibly 15 minutes, 5 minutes, and even 1 minute, believe it or not) in the hopes of maximizing profit each day! Is it possible? MOST DEFINITELY!
BUT… as a trader, you must remember the size of your leverage determines how much you’re willing to lose as much as it’s an indication of how much you’d like to extract from the market.
A scalper could have high leverage because they’re in the markets for a shorter period than a position trader. However, it is dangerous because they place for trades, which magnifies POTENTIAL profit or loss.
Position traders and leverage
Now let’s take into consideration a position trader. Would this trader need high leverage? Well, remember this trader is looking to hold a position for months, possibly years. Ignoring short-term price action and going with the bigger picture of the markets.
Now they do not need high leverage to make an enormous profit because the move they are anticipating is significant and may take a while to play out in itself.
Therefore position traders are at an advantage when trading with smaller sums or low leverage.
Leverage in other markets
I find this exciting, if I must be honest. Think about it this way, the leverage you use to trade indices and the power you use to place a position in the Forex markets may be the same BUT yield different results.
For example, making 100 pips of USDJPY is not the same as gaining 100 pips on NASDAQ. So as beneficial as it may be to have high leverage, it can also be perilous.
Leverage is such a beauty when you are “certain” about your trading strategy but remember you never send your soldiers to war without a backup plan.
Happy trading, fellow traders.