Using Leverage to Trade Forex

Using Leverage to Trade Forex

If you are looking to trade forex with a small capital outlay you will need to know about leverage.  Leverage is one of the factors that sets forex apart from the stock market and other financial markets.   If you are thinking about using leverage then you should know all you can about this.  If you trade forex with leverage you have to be aware of the risks as well as the benefits.

What is forex leverage?

When you use leverage you will be able to buy more on the market will a smaller amount.  Forex brokers offer more leverage than brokers in any other market.  The common limit for leverage offered by forex brokers is 100:1.  There are some brokers who offer extreme leverage which is 400:1.  The people who benefit the most from having leverage are traders that do not have large amounts of capital.  Other traders that get the most from leverage are also those who use trading systems that need high amounts of leverage.  The benefit of using leverage is that you will be able to make more profits than you otherwise would be able to.

Should you use leverage?

Before you start using leverage to trade forex, you need to know whether you should or not.  There are many benefits that you can get from leverage which will make it very attractive.  The main benefit that you get from this is that you will be able to trade in ways you generally would not be able to.

Individual traders generally do not have that much money to put into their trading account.  This means that they are going to make small profits and they will not be able to use certain kind of trading systems and strategies.  When these traders use leverage they will be able to make greater profits and use strategies that generally require more money than they have.

Of course you should be well aware of the risks you open yourself to when you use leverage as well.  Many traders believe that the risks of using leverage are much greater than the potential gains.  When you use leverage on your trades you increase the amount you stand to lose.  As the forex market can change so quickly the amount you can lose could be your entire trading account.

When you should trade forex with leverage

There are certain times when it is less risky to use leverage.  You should be aware of these times as they are when you can use leverage.  If you use leverage out of these times ten you increase the risk of the trade.  Of course it is recommended that you avoid using leverage as much as possible even in the good times.

  • When the market is at the most volatile you should not use leverage.  The reason for this is that the market will change too much.  If the currency pair you are trading moves down 10 pips you should lose your entire trading account depending on the leverage you have used.
  • When the market is slow you can use leverage without as much risk.

This article looks at who should trade forex with leverage and when they should do this.

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