How to Use Leverage in Forex Trading

How to Use Leverage in Forex Trading

Submitted by adil on Mon, 05/12/2014 - 17:59

Using leverage to finance trading has become increasingly popular. In general the term leverage is used for borrowed funds that are used by investors to carry out any kind of business including Forex trading. This article will help you use leverage smartly in Forex trading, because leverages can amplify the profits as well as losses considerably.

Tips on using Leverage in Forex Trading:

It is always tempting to make profits without using any of your own money, but using too much of borrowed funds can lead to bankruptcy if the trading business gets a hit. Being professional in the approach can help avoid many problems associated with using high level of leverages in trading business.

Keep a check on your losses: Keep track of what you are losing in each trade. You can cap your losses by using trading strategies to be always on the winning side. Remember that you have to return the leverage one day, so you must be making enough to sustain profits and be able to return the borrowed money without a problem.

Take a strategic break: Have you seen poker movies? Or ever gambled in your life? Then you would have observed the fact that when players try to go the extra mile, they always lose everything. Never allow temptation to lead you astray. Taking a break at the right time will not only ensure you avoid losses; it will also help you maintain concentration to succeed in the long run.

Don’t add sugar to spoiled milk: If you are sensing imminent losses, back out straight away. Instead of using more leverage in an attempt to double out or average the losses with some profits, you should quit trading and save the leverage for another day. The deeper you go trying to turn loss into profit, the more leverage you will consume, and in case you are not able to recover anything you will be deep in storm waters waiting for a miracle rescue.

Inject leverage according to your margin: Being cautious with using leverage is the practice of professional traders. Using high ratio of leverage such as 50:1 means even a 2% negative movement will drain all your equity voiding the margin. Always avoid undue pressure upon yourself and trade in your comfort zone. As a default; use 5:1 or at maximum 10:1 ratio for leverage input.

The availability of various online trading platforms and the abundance of cheap credit are major factors in the ever increasing number of retail investors in Forex trading. Since Forex trading is usually done in overseas exchanges, using high ratio of leverages has become a norm. A common mistake traders make is that they forget they have to return the leverage and also make some profit to sustain the business. This adds extra pressure on the trader to go the extra mile, which usually ends up in big losses.

This does not mean you should not use leverage for business, but it simply implies that being professional and having a clear head will help you use leverage more effectively in getting the most out of Forex trading.