This article looks at the way in which you should use leverage to trade in the currency trading market.
In the currency trading market, you may be offered leverage ratios of 100:1 or higher. This does not mean you should make use of this high leverage. To ensure that you do not lose all your money, you should only use make use of high leverage if you have done suitable calculations and implemented risk management.
Margin and Leverage
Buying on margin is when you make use of borrowed funds from your broker to purchase currencies. Yu will be required to deposit funds into your trading account and this amount will be used as a deposit to allow you to trade for a certain value.
If your broker offers you 50:1 leverage, it implies that he is prepared to let you borrow 50 times the sum of your account balance. If you wish to enter a trade to the value of $10,000 and you are being offered leverage of 50:1, you will need to have $200 in your account to enter your trade. If your trade was to increase in value to $11,000, you would make a profit of $1,000. This is representative of a return of 10% on the purchase price, but you would experience a return of 500% on your equity.
The high leverage ratios that are offered in this financial market are due to the liquidity and size of the market. It is extremely easy to enter and exit a trade in this market. This allows you to control how much you are willing to lose on any one trade.
Should You Use All Your Currency Trading Margin?
The general rule is that you should not use the entire available margin. You should only make use of leverage if you know the advantage of the trade is on your side. You should plan your trades and know the exact point you intend exiting that position if the market is moving in the right direction for you. Once you know the risk regarding the number of pips, you can determine how much you will lose if your stop-loss is reached. The general rule is that this amount should never be more than 2% of your trading capital. If your leverage is calculated at a higher rate than a maximum of 3%, you should reduce it accordingly. Each trader has his own risk settings and your risk percentage may be higher, but you should use 2% as a general guideline.
If you have a larger account balance, you will find it easier to make use of leverage. The risk with leverage is that you are using borrowed money to enter your trades. If the market is not in your favour, your losses are magnified by the leverage ratio used.
Trading in the forex currency markets offer many profitable opportunities. The use of leverage can magnify these profits to a massive degree. To make use of leverage, you need to understand risk management and how to set exact stop-loss orders. You also need to be extremely disciplined in your trading as you need to follow strict rules when you use leverage.