While starting as a beginner in the fx market, you must have come across the terms margin and leverage. But do you exactly know the proper use of these tools? This is two most important tools used in maximizing profit in the business.
Therefore, it is important for all, especially newcomers who are thinking of investing in the market must gather sufficient knowledge on forex understanding leverage.
“Good trading starts with good knowledge.”
What is leverage in forex trading?
This is an important tool used by both investors and companies. When a trader uses this tool, he is likely to increase the amount of return on investment. This tool gives the option investment by using different methods and a margin account.
If a trader does not learn to use leverage, trading would be a platform for major banking institutions, hedge funds, and large private depositor. The retail traders crowd would be limited.
Significance of understanding leverage in forex trading
Leverage offers an option to market to earn maximum profit from the exchange of rates of different countries. It is of high important as it is a kind of loan provided to the investors by brokers whom they hire for managing their account. The amount can be of different and depends on the current position.
What is the downside of leverage in the forex trading?
While leverage gives a chance to maximize their return on investment, it is also associated with some risks or negative points. At times, it may go against the investor as well. To make this point more clear here is a brief example, when the exchange rate of currency moves in the opposite direction, the leverage may increase the investment amount which is going to be lost with a closing trade. This kind of situation may cause a significant loss for traders. To stop this situation from happening, use stop loss and limit order that help them to save their losing amount.
“Invest wisely and let the success makes the noise.”
A common mistake that most of the new traders make is they use leverage overlooking the risks associated with it. It is a known fact that when he show a lack of concern towards leverage risks, they are proceeding towards the path of destroying their accounts.
For example, suppose a trader has $1000 balance in his account, and he chooses a leverage ratio of 100:1 which means each pip movement will be equal to $10. If his stop loss order is just 10 percentage in point away from the entry, it means the trader is going to lose $100.
Therefore, once you gather sufficient knowledge on forex understanding leverage, you can better understand how fx leverage actually works and how you can maximize your profit making small investments. However, brokers can better guide you in this process and so it is suggested to all newbie traders to hire a reliable to get every detail about margin and leverage.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.