There are many traders who are drawn to the foreign exchange Melbourne because of the leverage on offer. The leverage that you can use with forex exceeds any of the other financial markets. However, you have to consider what the pros and cons are of leverage. Many traders view leverage as a double edged blade, because it can take away as much as it gives.
What is Leverage?
Before you can look at the pros and cons of leverage you need to know what this is. Leverage is the borrowing of capital from your broker to increase the size of your trade. When you borrow from your broker you are using your trading account balance as collateral. If your trade make a profit then you do not have to worry about the use of leverage. However, if your trade makes a loss then you are going to lose more of your trading account balance then you may anticipate.
Leverage on the Foreign Exchange Melbourne
As the foreign exchange Melbourne is decentralised market with limited regulation forex brokers are able to choose the amount of leverage that they offer. There are some countries that have regulations which restrict the amount of leverage on offer. Brokers located in the United States of America are the most affected by these rules. These brokers are limited to 50:1 leverage on commonly traded currency pairs and 20:1 leverage on exotic pairs. However, most regulated countries have not limited the amount of leverage on offer.
This means that brokers in other countries are able to offer as much leverage as they want to a trade. This manifests in leverage amounts of 400:1 being offered by brokers. These extreme amounts should be viewed with caution and it is recommended to never use such large amounts. Many expert traders state that the use of 20:1 leverage is more than enough for any trade.
The Benefits of Leverage
If you are going to use leverage when you trade you need to be aware of the benefits. The main benefit of leverage is the increase in profits that it offers. When you use leverage you increase the size and value of your trade. This increases the amount you can make with a profitable trade. Another benefit of leverage is that it opens the forex market to more people. The use of limited capital is made easier with the addition of leverage. Of course, this should be done carefully as limited capital does increase the risks of leverage.
The Drawbacks of Leverage
While there are benefits to the use of leverage you should be aware of the risks and drawbacks as well. The primary drawback of leverage is the amount that you can lose. When you use leverage you increase the amount you make, but you also increase the amount that you can lose. If you do not use leverage correctly you can deplete your trading account with a single trade. The use of leverage also increases the overall risks of trading which should be considered. If you are a conservative trader then you have to be very careful about the risks of leverage.