The currency market is a place where big money can be earned. This market has an average trading volume of over 3 trillion dollars, and the number of participants is growing every day. The forex market allows you to use one very special feature that is not as common in the stock market: leverage. However, the leverage of the forex market is not a simple 1:2 leverage, but 1:100, and sometimes even 1:400. This means that for every dollar you have in your account, you can trade one hundred dollars and profit from those hundred dollars.
Leverage can be great when the trade is going in your favor. Since the leverage makes the trade a hundred times bigger, your profits are also a hundred times bigger. This means if the currency pair moves 1% in your favor, you made a profit of 100%, or doubled your money. If the currency pair moved 3%, your multiplied the investment by four. With higher leverages, even a change of 0.5% can quadruple your money.
Although leverage is great, it can also wreck havoc on your trading account. Just as your profits, your losses are also multiplied by the leverage. If a trade is going 0.3% against you, you are losing 30%. If it is going 1% against you, your entire investment is gone. If you invested all your account balance into that trade, you will need to fund your account again.
The ugly truth behind leverage is that it is a great tool by brokers to lure traders and make huge profits. Leverage is a type of loan, so the broker is earning interest on the money it lends you for leverage. Also, brokers use leverage to attract traders, but they hide the risks behind shiny presentation of profits. Honest brokers mention that leveraging your positions can bring big losses with them as well as huge profits.
Handling leverage is very easy, and should be exercised by any trader. When opening a trade, make sure to select the proper amount of leverage. Most good trading systems automatically adjust the leverage for optimal results and minimal risks. This way you can enjoy both worlds – profit from leverage, but not be harmed too much from leveraging a losing trade.
To trade safely with leverage, get yourself an honest forex broker and a good forex trading system.
By: Nadav Snir
About the Author:
About the author:
Nadav Snir is a stock market trader and forex trader. You can find more information about forex trading and forex brokers at his site at http://Great-Info-Products.com/Forex/index.html.
