Forex trading requires leverage to be successful. It is sometimes called a double-edged knife. Stanley Druckenmiller referred to Soros’s lessons. “Soros has shown me that when you are able to believe in a trade, it is necessary to take the plunge. It takes courage and determination to be a pig. It takes courage riding a profit with enormous leverage.” This statement demonstrates why leverage can be a double-edged weapon. Leverage can increase your profits significantly or leave you stranded, not only in terms of financial but also psychologically.
Read MoreThe Forex Market has very high leverage. It is extremely risky to apply leverage without having the right knowledge and understanding.
Leverage Trading
Leverage trading can also be known as margin trading and finance margin. Offshore brokers higher leverage trading allows traders to borrow funds to open large market positions by depositing a small amount.
Low spread high leverage brokers can offer leverage up to 500x, while some high intraday leverage brokerages offer maximum leverage up to 1:3000. Traders who use 1:100 leverage require only 1% to trade. Brokers lend the rest.
While this may seem appealing, it can also be a risky option that could blow your account. Leverage has become a major draw in forex trading. Many people are easily drawn to forex trading, especially those with little money and less knowledge. These people believe that trading platforms with high leverage can make quick profits, and they may become millionaires in just a few weeks.
How Does Leverage Actually Work?
The highest intraday margin brokers allow traders to trade for greater positions while using a smaller margin. Take as an example, the highest leverage intraday broker offering 1:500 leverage.
The trader wishes to trade EUR/USD. The trader needs $ 12,347.45 for his account. The low spread forex brokers are offering 1 to 500. You also have $500 available to the trader.
1:500 leverage means that only 1% of your total trade amount will be required to trade in the account. The brokers with the highest leverage will finance the remaining 49%. Now the trader only has to contribute $24.65 and the higher leverage regulated brokers can lend $ 12,322.80. Margin = $24.65. Also, $500-24.65= 475.35 is the Margin.
If the market is against the trader, the margin free of charge starts to decrease which can lead to unrealized losses. The high leverage regulated brokers will close the trader’s position automatically if the market continues its negative trend. Funded money will also be taken out if the free margin is exhausted.
Sometimes, high volatility means that the broker cannot close the position. This can lead to depletion of the margin and sometimes the funding money.
However, if the market favors zero spread low commission traders, profits continue to increase until the stop-loss occurs. The money is returned and the trader gets the profit. Intraday traders prefer brokers that offer high leverage and low brokerage.
Pros Of Using Leverage
As mentioned, the greatest advantage is that we have access to additional funds lent out by high leverage brokers. This gives you greater market exposure.
This exposure will allow you to increase your profits. Let’s say that you are trading USD/AUD because you believe the Australian Dollar will drop in value. Now, you would like to trade with micro lots (10,000). This leverage is 1:500. As a margin, you’ll need $14.55 USD. The USD/AUD exchange rate is 0.72711. With only $14.55 USD, you can get exposure for $ 7,275.1 USD.
Your profitability as a trader will be significantly increased by using the highest intraday leverage brokers, which offer high leverage such as 1:500 to 1:100.
Cons Of Using Leverage:
Leverage has two faces, just like a coin. If you do not analyze the trade properly, highest leverage in forex could boomerang against you.
Let’s look at the previous example. If the market goes against the trader, the margin free of charge starts to decrease which can lead to unrealized losses. The low spread high leverage broker will close the trader’s position automatically if the market continues its negative trend. Funded money will also be taken out if the free margin is exhausted.
Sometimes, high volatility means that the broker cannot close the position. This can lead to a decrease in margin and even a loss of funds. The trader is responsible for all losses. Traders must be aware of all documents that he signs regarding his right to seek reimbursement for any losses incurred while opening accounts with higher leverage offshore brokers. Before trading, it is crucial to have the correct knowledge and awareness.
Conclusion
The success rate of forex trading is low, as everyone knows. Only 10% are successful forex traders. It is tempting to hear that the forex market is the “Get Rich Quick” market. There is no such thing as a quick way to make money. Before you trade, it is wise to be educated.
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