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Should you use leverage in forex trading?
Written by: PaxForex analytics dept - Friday, 20 May 2016 0 comments
Financial leverage attracts a lot of traders to the forex market. Financial leverage allows traders to place orders that are significantly higher than their actual deposit - it can be viewed as credit provided by a broker. This tool allows forex traders to trade much more than they actually have and potentially achieve higher profits in the market. Of course the same applies for losses - a trader risks losing his deposit much faster when using leverage.
The biggest advantage of forex trading using financial leverage is the ability to trade positions of a larger size. As gearing is easily available with forex brokers, many stock and futures traders are moving to this market for the simple reason of trading more than their deposit allows them to trade. There are a lot of traders who are looking for an investor to finance their trading strategies, but with leverage it is possible to trade large positions without actually having substantial capital.
There is a relationship between leverage and its impact on your forex trading account. The greater the amount of effective leverage used, the greater the swings (up and down) in your account equity. The smaller the
amount of leverage used, the smaller the swings (up or down) in your account equity. As tempting the ability to generate big profits without putting at stake too much of your hard-earned money may be, you should never forget that an excessively high degree of leverage could drain your entire starting capital.
Should you use leverage depends on your trading strategy and your view on the market. Also it depends on your financial targets and the capital at your disposal. We also all understand that trading forex is risky and the higher your leverage is, the riskier the forex trading gets. This is why you should try to trade with as little leverage as possible, yet you should still look to achieve a profit that is worth your time.
By now you should understand why forex leverage is risky and why many traders are actually willing to accept such risks. Even though risks involved when trading without leverage are smaller, so are your returns, so you should definitely consider your depositing capabilities before trading without leverage. Also, not every strategy will be as profitable when you are avoiding leverage. Generally traders should consider marginal trading, yet the level of leverage should be chosen with care.