Forex trading with leverage
Leverage is a tool that allows to multiply the amount of investment in open positions, and this means that the brokerage firm may allow you to borrow additional funds
There is a consensus that it is difficult to make reasonable profits if the capital is less than $10,000 as a start in trading, meaning if your balance is $100, you will only reach a few profits, and if the currency you bought increases and achieved a hundred points gain, so the profit of $1 A day is nothing but a waste of time, so traders resort to the use of leverage.
Leverage is a tool that allows to multiply the amount of investment in open trades, and this means that the brokerage firm may allow you to borrow additional funds that may be worth up to $ 10,000, and therefore while the currency pair moves in your favour, you will earn 10 dollars, if you use leverage up to 1:100.
In other words, the forex trader has the opportunity to multiply his profits through leverage, as he takes advantage of other people's money to increase the volume of investments.
It is very important to know how to use leverage, especially in times when the market is experiencing confusion, as you can increase your profits by increasing your losses as well.
Forex trading strategies that rely on the use of leverage require that the optimum ratio be chosen after determining your risk tolerance. Therefore, the risk is the most influential factor when using leverage, especially in light of its increase in parallel with the increase in the potential profit opportunities.
The application of this rule assumes the use of a high level of leverage with stable currencies and discounted with currencies that usually experience a high degree of volatility. Also, the constant use of leverage requires the trader to be familiar aand sufficiently familiar with the forex market, especially as the industry's unwise use of this vital tool may wipe out your entire account balance in just a few minutes.
Tools available to the average trader
Technical development in recent years has given casual traders access to a range of trading tools that were previously restricted to the major players in the foreign exchange markets, which has helped in the massive expansion of the popularity of forex. On top of these instruments is the leverage that, before its emergence, was isolated in the hands of only large corporations and investors, who had very large assets to buy and sell huge amounts of currency. So it was different with the advent of leverage, where anyone can join the waiting list of traders as long as the traders are able to save a reasonable amount of money to open an account and trade in the forex market.
Most of the forex brokers provide their clients with the use of leverage tools in trading. The use of leverage does not require a lot of skill, but the most important thing in this area, is to know exactly what you will do with it before opening trading orders, because this ease will not keep you from huge losses in just a few seconds, because excessive use is the main problem Which most new traders suffer from, so be sure to take advantage of the advantages of leverage while avoiding its serious drawbacks.
The hidden side disadvantages of leverage
Leverage can be very popular among forex traders. But we cannot ignore that this leverage is very dangerous, because it is linked to the rapid movements of exchange rates. There are also many hidden risks that may lead to zeroing the account with ease.
There are a lot of brokerage firms that promote the use of leverage extensively. Thus, some traders, especially beginners, believe that it is the shortest way to achieve the profits that they aspire to.
Therefore, the higher the leverage, the more money traders pay to the brokers in the form of spreads with it.
So the pip value that a trader wins or loses, or pays as a spread, depends on the size of the position. The leverage allows traders to open positions in large volumes. That is, if you use 1:100 leverage, you will only need $1000 to open a position of 1 standard lot size, therefore, the value of each pip of the spread will be $10 (for currency pairs where the US dollar is the quote currency). This number may not be a problem if your account balance is $100,000, but it can be very costly if your balance does not exceed $2,000. In this case, you will lose for the price difference equal to 1% of your account balance on every two trades, regardless of the outcome of the trade. If you use a leverage of 1:10, and your balance is $2000, you will not be able to open standard lots, which will significantly reduce the broker's profits due to the small trading volumes you will be dealing with. Therefore, the lower the leverage, the less revenue the broker will get as a result of your smaller trading volumes, which will not be realized..
Leverage comes with significant risks, which is why it can pose a serious existential threat to your entire account despite this fact being ignored by many traders. If you want to learn how to trade successfully on a real account, make sure to use a reasonable level of leverage as much as possible. You should not move to high levels of leverage unless you know what you are doing. Finally, you have to ignore the idea that you will get rich through leverage alone because in fact it can lead to bankruptcy, so you need to be as careful as possible.