Leverage is one common strategy in forex trading that places a trader in a better position.Simply put, the concept is all about borrowing an amount to increase your investment in the market.Market experts have divided opinions on this concept as it has both advantages and disadvantages.
Those who are new to the trade would tend to invest in lower values.But they can employ the leverage strategy to place them at a better market position.Brokers would usually give 99% of your desired amount so you just need to shell out the remaining 1%.Say for example you want to start off with $10,000.If you use leverage you only need 1% which is $1,000 and the rest will be provided by the broker.Of course, this loan comes with an interest.
There are advantages and disadvantages to this strategy.One obvious advantage is that it will put you on a better shareholder value because of the higher investment.The usual trade for currencies don’t really move beyond 1% so you are likely to profit.
But this would put you in hot waters if the fluctuations go extremes.If the currency value slides down to an extreme low, you will also have higher potential for losses because of the higher investment you made.In this scenario, the trader is put at the losing end and it is only the broker who profits.This is why traders should be careful and think well before using this strategy.A lot of things have to be weighed and many factors should be taken into account.
Those who are already familiar with forex trading would pair leverage with some risk reduction strategy.The most popular of which is the stop loss strategy.In this case the trader puts a certain maximum or limit and when the values go near or beyond the limit he will order the broker to withdraw the investment from the market.With this, the trader will be able to preempt incurring bigger losses.