Leverage is one of the main elements of foreign exchange trading, and one of the features that makes it distinct from the market as a whole. Leverage is used by traders, provided by their brokers, to deliver more effective volatility. In essence, this makes it possible to trade forex for much more significant returns, and this is the main reason most traders choose to use leverage at all. But on the other hand, there are intense risks involved in leverage in foreign exchange markets that makes it difficult to trade with. As a result, many foreign exchange traders need to make sure they are in the right position to capitalise, through using leverage sparingly to inflate gains. However, only the appropriate risk control measures will make this feasible.
Anyone who enters the foreign exchange trading domain will be subject to leverage, and the potential for generating profits (and losses) from it. But for those that do so successfully, the value leverage can bring to your trading capital can be massive.
Leverage In Foreign Exchange Can Make You Money
The primary function and raison d’être for leverage in foreign exchange is its ability to inflate gains. Nobody gets involved with foreign exchange leverage because it can lose them money, and most traders actually choose forex because the leverage portion can be so vast. Leverage makes the size of each position you trade much more significant, so that the gains that come from it will be similarly large. Imagine for simplicities sake you are putting down 1 unit – leverage might account for a further 9, taking your total position size to 10 units. If the position gains 10%, you’ve made a 100% return on your money, thanks to the force of leverage. This is the beneficial effect leverage can bring, and it can ensure that trading results filter through much more quickly to end result. However, forex leverage can easily cause you problems, and traders need to exercise caution to make sure they are on the right lines.
Be Careful Leverage Doesn’t Bite
Leverage can bite with equal ease and severity on both sides of the market – just like it can profit on both sides of the market, depending on the position you are trading. But when leverage reverses in the markets, it has the potential to chew into your trading successes from past (and future) trades. Your trading capital may well be affected by the positions you trade and their success or otherwise. As such, you really need to make sure you know what you are doing in forex and why – only this will give you a realistic shot at turning a profit from your trading activities. You need to be sure at all times that you are able to meet your leverage liabilities, in order to ensure your account can survive any storm.
You Trade On Margin, So Cover Your Obligations
When you are trading on margin, as in forex, that isn’t a license to trade like a lunatic – you still need to make sure you can meet your obligations as you trade. This isn’t always easy, but it is an essential part of the process, towards ensuring that your profits are looked after. Margin calls can arise all too easily, and this can quickly tear down your account if you are unprepared. If you want to deal with leverage, you need to get on top of the risks it poses.