Why Forex Traders Love Leverage

Why Forex Traders Love Leverage

What is Leverage?

Leverage is the borrowed money from a broker in order to sustain a bigger position than you could with your actual capital deposit (equity). Leverage is not only used by Forex traders who want to utilize the opportunity to make more money than what would usually be possible. However, it is for this reason Forex traders love leverage.

As Forex traders with the leverage we get from Forex brokers we are able to double, triple and even quadruple our trading accounts in a matter of days, this is of course with high risk positions and scalping, but under normal circumstances the outcome is still possible over a longer period of time if the trader is disciplined in following their trading plan and keeping their emotions and psychology balanced.

How does Leverage work?

It is important to understand that you can leverage anything in life, leverage does not just apply to the Forex industry but to anything. Leverage is probably your best friend, especially if you are starting from no capital or with little capital. Now, for a beginner trader the wonder of leverage may still not have sunk in yet or for some they just go for the highest leverage because the numbers look cool. So let’s actually look at why leverage is a wonder.

Here is an example: often times you can get a leverage up to 1:500 which means you can trade positions 500x the size. Let’s say you deposited $100 into your trading account, this is now known as your equity. When opening your trading account you started by choosing the 1:500 leverage, this meant that with each $1 in equity you could open positions worth $500. How interesting is that??!

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Risks on High leverage

Higher leverages sound brilliant when you start trading with a small account because you’re able to flip accounts quickly and ball out on the fancy watches, fast cars and houses in the Bahamas!  This all sounds extremely dreamy because that is what it is, dreamy.

I am not saying it is not possible, not at all. It is possible, it is just not sustainable when you grow your capital to the point where the leverage just doesn’t serve you. Over time this system doesn’t work and eventually brokers themselves bring your leverage down.

The risks involved include the possibility of blowing your capital in a couple of trades because of things such as risk management and money management. Another known risk is OVER LEVERAGING your account. Over leveraging is very easy to do, especially when you’re on a roll and find yourself excited to just be trading and securing the bag, but this also allows for many errors and it leaves you exposed.

The more you lose in the Forex markets, or in any market, the harder it is for you to gain back the capital even with the leverage due to it becoming easier as time goes on to blow your account.

Opportunities on High leverage

There is one really good opportunity when it comes to higher leverage and that is making x amount more than you could have with the equity in your Forex trading account. So back to our example with $100 you can make up to $50,000 on a position if your margin is at 100%.

The beautiful thing too about leverage it improves capital efficiency. You are now able to do more with less. It is like if you had $1 you could only buy 1 sweet but with someone borrowing you $500 more, you can now instead of getting 1 sweet you can now get 500 sweets even though you only had $1.

So what is my opinion? My opinion is that beginner traders need to focus more on the smaller amounts of leverage, being 1:100 or 1:200 and nothing higher so that they can preserve their capital for as long as possible whilst giving themselves the best chance to make significantly more!

Remember,

Risk small and win big!!

Happy trading fellow Traders!

Leverage FAQ

Leverage is the borrowed money from a broker in order to sustain a bigger position than you could with your actual capital deposit (equity). Leverage is not only used by Forex traders who want to utilize the opportunity to make more money than what would usually be possible. However, it is for this reason Forex traders love leverage.

The simple answer is you lose money. Many people who start trading tend to go with brokers with the biggest leverage possible. But they then end up over leveraging their accounts and ultimately end up blowing them in a short space of time. Leverage can be good in Forex though so it just needs to be used wisely.

Leverage is a double-edged sword that can either work to grow your account or losses to the point where you lose more than you put in. 

The greater the leverage applied to your capital the greater the opportunity for lose too.

Yes, it is very possible for leverage to significantly increase profits when positions go in your favor. 

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Emmanuel Maphosa

Emmanuel Maphosa

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