Using Leverage with Forex

Using Leverage with Forex

What is leverage?  Leverage is the use of borrowed capital, such as margin, to increase the potential return of an investment.

In Forex trading, leverage is used to significantly increase the returns on a currency pair trade. By using ‘borrowed’ money to increase the amount you can trade you can come out with a greater profit from the fluctuations in exchange rates between two different currencies. Forex brokers offer the highest leverage rates available in any investment market.

Win Some, Lose Some

Of course, this ability to earn profits over and above the amount of money you started out with can also work against you. If your trade goes in the opposite direction of the one you anticipated, you can lose not only the money you had on deposit in your account but the leveraged money as well, putting you in deep debt and in a bind to recoup the leveraged money.

There are ways to safeguard against losing all your money.

If you are new to Forex trading, always start with a demo account. Most brokers offer these practice accounts for short periods of time so you can learn the ins and outs of Forex trading with virtual funds and not put your own money at risk. Once you feel confident about trading, you can move over to a real account.

As a newbie don’t take the leverage offered by your broker. Start with small amounts of your own money until you gain some experience. Then take a small leverage.

Leave the Greed Behind

Don’t be greedy. Never trade more than 2.5-3.00% of your original deposit on any one trade. In addition, if you see the price moving in the right direction, exit while you still have a profit. Small profits are better than large losses.

If you are just starting out, avoid copying how experienced traders place their trades. They have developed a sense of market moves and are usually better able to weather the ups and downs of the market.  They are more likely to stay put and not sell out when the going gets tough. In addition, they know how to use other trading tools available to them in order to maximize their trading leverage.

Develop your own personal strategy and stay with it for a lengthy period of time. All traders experience more losses than gains at first. If you are disciplined enough to stick to your strategy, eventually you will see some profits which will make up for the losses you have incurred till then.  If, after six months, you are still not ahead, switch strategies.

Decide if you prefer to trade by using fundamental analysis or technical analysis. Each one has its own advantages and disadvantages. Learn these differences and then make an educated decision.

 

Since you can never really predict what price will be reached, don’t focus on reaching a certain price. Instead, try to get a correct reading of the direction the price will move.

Stop Losses

Here is where the use of stop loss orders comes into play. With stop loss orders, trading will automatically cease when it reaches a pre-specified point, thus preventing additional decline.

Never trade on emotions. As a novice trader there is no doubt that it is difficult to watch the market moving against all odds and instinctively you want to reverse your position and get out. But this is self-defeating. Always stay with your original trading plan.

One way for all Forex traders to significantly reduce their stress is to use an automated Forex system which has many advantages over discretionary trading. Automated trading allows the trader to pre-set his trading parameters so that the trade is executed automatically without having to be present or online, 24 hours a day, every day of the week. Automated trading has become a very popular form of trading as it provides the trader with flexibility, automatic execution and a complete lack of emotional interference.

 

 

 

 

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    One comment

    1. Mike Lamothe says:

      Great read. Leverage is a great tool but like you said it can create huge losses if you get greedy. What I have found with demo accounts is that my strategy worked great and then once I opened a real account, the same strategy stopped working. Also, some of the forex brokers front run their clients by betting against you. if you are short a currency pair, they will go long. They don’t want you to make money because they lose money. It is important to check out any forex brokers to make sure they don’t do this. There is a list of these type of brokers to avoid if you google it.

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