BENEFIT AND DISADVANTAGE OF FOREX LEVERAGE.

 

                     UNDERSTAND THE LEVERAGE IN FOREX TRADING

 

 

 today is we're going to be talking about leverage when trading the currency exchange market now here's the thing if you are a newer trader or you're an experienced trader a lot of people have questions about leverage and what kind of requirements they need what kind of brokers they should be using and some definite things to avoid when it comes to leverage now if you're a newer trader then I want to make something very clear leverage a lot of times is this idea that you can make a lot of money on a very small amount of money if you have something like a two hundred dollar account a lot of newer traders are very excited by the idea of having leverage because they could have something like five hundred to one leverage which gives them a tremendous more ability to turn that $200 into much more you know it's exciting because a lot of times people get the idea that they could take their $200 and with leverage they could theoretically make it into $20,000 in a relatively short amount of time now to be fair this is entirely possible the problem is we don't get reward without adding more risk unfortunately leverage does not necessarily make our risk less so in fact it exponentially increases our risk when we increase our leverage so the more size we are taking the more the bigger our lot size obviously the more money we can make but more importantly in my case when you've been in the game for a while when you've been trading you know that more importantly this increases our risk and so when it comes to leverage my possibly unpopular opinion when it comes to leverage is to use as little leverage as you can possibly use this is my opinion I think that you don't need to use a tremendous amount of leverage to make a lot of money now when it comes to currency exchange though we do need leverage of some sort so what we're going to do is we are going to talk about what's an appropriate amount of leverage what kind of leverage do you actually need and why do you need leverage in the first place well when it comes to currency exchange what are we actually doing we're trading currencies against one another if we are taking a look at the euro USD well truthfully this currency pair in terms of percentage-wise really doesn't move that much right it's not like we're seeing something like if we were trading Tesla stock or we were trading Bit coin or we were trading something you know different like gold may be right where we see these bigger swings we don't see 10% up in a day we don't see 20% down in a day where you can capture those bigger gains so this is where leverage comes in essentially a broker makes it possible for you to borrow currency right actual currency so that you can capture bigger movements in the market think about it this way if you only have two hundred dollars in your account well if you have two hundred US dollars the actual amount of that US dollar is very very small it's going to go up or down in very very small amounts your value of that two hundred dollars might actually only go to something like a 199.99 so you might just have a very small movement and that's only a difference of one cent so that's really not going to do us too good so what a broker does is it allows you to use that $200 on margin basically you're going to pay the broker back if you lose all of that right it allows you to trade this $200 on margin or leverage it up and essentially say well actually I'd like to magnify amplify if you will the movements of this currency exchange so if the value goes from you know this amount to this amount a small small movement in the actual value of the currencies relative to one another I want to profit bigger I want to profit a larger amount or lose a larger amount by applying leverage that's what broker does that's why retail traders need a broker in order to actually interact with the currency exchange market so now that we understand that what are some things to think about how much is an appropriate amount of leverage well me personally when it comes to the leverage that I use on my own accounts I really don't think I need more than fifty to one leverage as long as I am using proper risk management and using small positions in fact I like the idea of setting a fifty one a fifty to one leveraged account because it allows me to not get crazy with my position sizes if I'm trading something I want to risk let's say one percent of the account on a trade if I want to do that I don't need an incredible amount of leverage in order to get a position going that's going to risk one percent in order to do that let's say that you had a one thousand dollar account well you have a thousand dollars in your account you want to risk one percent well that means you need to risk ten dollars well if you risk ten dollars on a one thousand dollar account and let's say that you're doing you know a hundred pip stop loss or a ten pip stop loss the actual lot size that you're going to need is not going to be very big and so you don't need a tremendous amount of lot size or a little tremendous amount of leverage if you are trading a much larger portion of your account on any particular trade I would personally caution against this because you may be kind of going into the territory of risking something like 10 plus percent on a particular move which think about it this way if you're risking 10% on a move it only takes you five losses in a row to get down 50% on your capital and actually if you actually do the math on that it would actually be quicker than that because you're losing capital along the way we won't get into the math but just understand that as you lose capital the percentage it does matter and so the more risk that you apply to your account the more you know obviously the faster you can lose the account and so when it comes to leverage I don't need more than fifty to one leverage a lot of times you're gonna see brokers and you're gonna see people wanting to show that they have five hundred to one leverage or even further one thousand to one leverage now what are some of the perks and some of the cons of this well obviously this is a perk to some people because theoretically you could take a small amount of money and leverage it up like crazy and you could see that account fly to the moon right you could grow an account really really fast on the contrary though of course you do not get reward without adding risk and so with that said essentially when you leverage up an account like this you're basically amplifying the moves tremendously so they think about it this way the best way I like to look at leverage is to understand that ok the swings in your account are like this normally let's say that you have 50 to 1 well when you go the route of doing 500 to 1 and you start using all that leverage right you apply bigger positions your account swings are like this right you get much much crazier ups and downs and the problem with this is that just a series of losses can lead to blowing an account rather quickly and so personally I avoid this style I'm not the kind of trader to go big and to go heavy I would rather build a profitable system on lower lot sizes building the account over time rather than trying to do it quickly the cool thing about the foreign exchange market is it'll be around here forever the exchange rate between different currencies is not something that we will probably ever see go away and so I like to take my time I like to keep my position small and I don't need a lot of leverage so my opinion 50 to 1 is perfectly fine in some places in the UK I know you know even thirty to one is probably just fine if you're willing to use small positions and you're willing to be patient with your trading guys I hope you got something out of this article please must be comments below