What is Leverage?
You can trade Forex and CFDs on leverage. For example, the leverage of 10:1 allows you to trade up to $10 for every $1 in your account. Broker leverage refers to the ratio between the trader’s funds and the size of the broker’s credit. In other words, leverage allows traders to gain access to much larger volumes than what they deposit to their trading accounts.
It is essential to choose a forex broker offering high leverage, but also to handle this tool with great care. In forex, as in any market, leverage is your friend or foe. Used carefully, it can greatly increase your profits, but it can be a double-edged sword that brings you heavy losses if you’re not careful. Think of the money you put into your forex account as fuel to power your trades. It’s important to have enough fuel in the tank so that your engine doesn’t stall along the way. This is where leverage comes into play. Check out the simple fx review at the Traders Union website.
Trading with High Leverage
If you trade with a high leverage forex broker, then you are essentially borrowing funds from your broker to enhance your returns on investment. A high leverage forex broker is one that offers traders an opportunity to trade in the foreign exchange market using very little money and make profits in the process.
High leverage forex brokers offer up to 1:1000 leverage. This means that for every $1 you have in your account, you can trade up to $1000 worth of currency. The higher the leverage offered by a broker, the riskier it becomes.
The world’s largest and most liquid market is not for the faint of heart or the inexperienced. Leverage, which can amplify gains as well as losses, can be a trader’s best friend or worst enemy. And like all friends, sometimes you need to know when to say goodbye.
The forex market is a place to earn good profits and at the same time, the trading includes a high level of risks too. It is important to estimate the level of risk in each trade and try to take more advantage of it.
The forex trading strategies must be able to face any kind of market conditions, which may include highly volatile or calm conditions. It should also be able to work in different market conditions such as trending or ranging markets.
Forex trading strategies can be developed by following the technical analysis and through the fundamental analysis. The technical analysis is concerned with the study of past market data, primarily price and volume. The fundamental analysis deals with analyzing the economic situation related to the prices of financial instruments, including currency pairs and stocks. The technical analysis can help you identify trends while the fundamental analysis gives reasons behind those trends so that you can forecast what will happen next.
How to Trade with Forex?
When you open a position, your account balance is the collateral. But what happens when the market moves against you? In the case of forex trading, doing it on margin can offer benefits as well as drawbacks. Although the most common margin is 2:1, some brokers offer 4:1 and even higher margin requirements.
For example, imagine that a trader has $1,000 in their trading account and decides to use a leverage of 200:1 on EURUSD. They could buy $200,000 worth of currency with this leverage — a trade worth $200,000 — with just $1,000 as collateral.
But if the price moves against them, they need to add more money to their account just to maintain their original £100,000 position. If they don’t have enough funds in their account to do that, their broker will automatically liquidate (close) the trade. That’s the basic principle behind using leverage for forex trading.