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Leverage is the most vigorous aid in Forex trading. It is also referred to as a double-edged sword. Remember what Stanley Druckenmiller said referring to what Soros taught him? “Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage.” This statement justifies why leverage is a double-edged sword. Best broker with high leverage can either significantly increase your profits or make you deserted not only financially but also psychologically.Read More
The Forex Market provides very high leverage. And, applying leverage without proper knowledge and understanding is a highly risky game.
Leverage trading is also known as margin trading or finance margin. Leverage trading allows a trader to borrow funds to open a large position in the market by making a small amount of capital deposit.
There are many high leverage regulated brokers who offer leverage upto 500x and some highest intraday leverage brokers also offer highest leverage in forex of upto 1:3000. If a trader is using 1:100 leverage then he requires only 1% of the total amount needed to trade in his account and the rest of the money is lent by the broker.
This might seem tempting but it also has an extensive capacity to blow your account if you lack the knowledge about risk management. Over time the forex broker with lowest commission has become the enticement in forex trading. Many people, especially those with less money and knowledge but full of greed are easily attracted. The unrealistic expectation and hope make them believe that using leverage can bring profits quickly and they might turn into millionaires in a few weeks.
How Does Leverage Actually Work?
The Highest intraday margin brokers will allow traders to trade for relatively larger positions with a minimum amount of margin money. Take an example of the brokers that offer high leverage for intraday who are offering 1:500 leverage.
The trader wants to trade EUR/USD with a Lot size of 0.1 and the ask price of EUR/USD= 1.23228 USD. The trader will need $ 12,347.45 in his account. The broker is offering 1:500. And the trader has $500 in your account.
1:500 leverage means that you’ll need only 1% of the total amount needed to trade in your account. The Remaining 499% of the amount will be funded by the broker. So now the trader will only need $24.65 from his side and the rest $ 12,322.80 the broker lends. $24.65 becomes the Margin. And $500-24.65= 475.35 becomes the free margin.
If the market is going against the trader, the free margin starts to deplete which is an unrealized loss. And if the market continues to go against the trader then when the whole free margin is depleted a stop-out will occur where the position of the trader will be closed automatically by the broker and the funded money will be pulled out.
Sometimes due to high volatility, the low spread forex broker is not able to close the position which results in depleting the margin and a few times the funded money too. Know more about why brokers with the right liquidity providers are important to choose while trading.
But if the market goes in a trader’s favour the profits keep adding to the free margin till the stop loss occurs. And, when this occurs the money lent is pulled back and profits are released to the trader. Intraday traders prefer high leverage brokers with low spreads and brokerage.
Pros Of Using Leverage
The biggest advantage that has been already mentioned is that it gives us access to the additional funds that are lent by the higher leverage offshore brokers and allows you to get more exposure to the market than you would otherwise have.
This exposure allows you to magnify your profits. Let’s say you are trading AUD/USD because you believe that the price of the Australian Dollar would fall. Now you want to trade with a micro lot size (10,000). And you are using 1:500 leverage. This means you will need $14.55 USD in your account as a margin. The price of AUD/USD is 0.72751. Now you will be able to get the exposure for $ 7,275.1 USD by using only $14.55 USD from your side.
Using the highest intraday leverage brokers who give high leverage like 1:500 to 1:3000 will significantly increase your profitability as a trader.
Cons Of Using Leverage:
However, leverage also has two faces just like a coin. Brokers with the highest leverage can also boomerang on you if you have the wrong analysis of the trade.
Let’s take the previous example into consideration. If the market is going against the trader, the free margin starts to deplete which is an unrealized loss. And if the market continues to go against the trader then when the whole free margin is depleted a stop-out will occur where the position of the trader will be closed automatically by the broker and the funded money will be pulled out.
Sometimes due to high volatility, the broker is not able to close the position which results in depleting the margin and a few times the funded money too. The trader is liable for all the losses.
A trader needs to be aware of the documents he is signing regarding the right to recover any loss while opening an account with the lowest brokerage and highest leverage.
So, it becomes crucial to have the right knowledge and awareness about everything about high leverage low brokerage trading before one starts to trade the market.
We all know that the success rate in forex trading is very low. Only 10% of the traders are profitable. The forex market is being promoted as the ‘Get Rich Quick’ market which is alluring to the ears. And we all know that there is nothing like a get rich quick kind of formula. So, it is advisable to have the proper education before you start trading.