Leverage, in fx, is the ability to use other people’s money for your own trading purposes. Since a relatively high degree of leverage is allowed in trading fx, it is possible to garner superior profits in a relatively short amount of time. It is also possible to leverage too much and watch an fx trade get whiplashed to death. So, before you start trading fx, sign up for a “demo account” and research what happens to trades using different levels of leverage. Keep your eyes on the relative level of volatility, too (using an “ATR” – “Average True Range” indicator – if necessary). When things are quiet (i. e., relatively low volatility), a highly leveraged fx trade is not so dangerous. However, when things start to rock n’ roll (i. e., high volatility), a highly leveraged trade can rapidly show its fangs.
Beyond this, you need to realize that fx is the last frontier of highly individualized, non-regulated, global trading. All you really need is a sound knowledge base in order to succeed.
Becoming More Familiar With FX Trading
In many ways, fx trading is very different than other investment venues. First of all, it is one of the world’s biggest and most rapidly growing capital markets. Unlike many other investments, forex does not stop at any national boundary; there’s no one central regulatory authority. Secondly, forex is actually a very level playing field, in that all one really needs is knowledge in order to succeed. Third, your ability to create customized investment vehicles is almost beyond counting; there are over 80 currency pairs that you can trade, with durations from 1 minute to more than 1 year. Finally, in many cases, you can leverage your account beyond a ratio of 100:1. Few other investment accounts allow all this.
How The Use Of Leverage Can Affect Your FX Trading Return
Leverage to a trading account is what gasoline is to a fire. Too much can be an incendiary experience. If you’re a beginner, view the whole issue of leverage with a very cautious eye. Yes, here lies the path to glorious profits – as well as the ability to blow up your account. If you maintain a leverage ratio of 50:1 and use intelligently placed stop losses on all your fx trades, you probably will never have a searing trade experience. On the other hand, if you move your leverage ratio up to 100:1 or more and fail to place stop losses into effect, then you have no one to blame – except yourself – when a trade whiplashes and burns to a crisp.
Making FX Trading Profits Using Leverage
The most painless way to learn how to trade with a high degree of leverage is to practice with a “demo account” that almost any fx bank or broker can provide you. Start off slow. Execute a trade that requires you to place “10% cash down” in your margin account (that means that you have a 10:1 leverage ratio). Watch what happens (and how fast it happens). Then, when you feel a bit comfy with what you’re doing, move up to only 5% down (a 20:1 leverage ratio) and trade fx again. Then, move up to only 3.3% down (a 30:1 leverage ratio) and only 2.5% down (a 40:1 leverage ratio), etc. Somewhere, you will find the right level for you.