How to Determine Safe Leverage on Forex Market
Credit to Author: THE MANILA TIMES| Date: Thu, 09 May 2019 00:00:46 +0000
Leverage is the ability to trade with more money than you currently have.
For example, imagine that you currently have 100 USD on your Forex account. Since GBP is in a bullish mood, you decide to buy it at 1.30000 USD/GBP. In a couple of hours, it reaches the resistance level of 1.30500 and you sell your GBP. At the end of the day, you’d have made 0.5 USD — which is respectable, but not that impressive. You certainly won’t be able to live off this profit.
Now, let’s add leverage to the mix. With 1:10 leverage, you can trade as if you have 1 000 USD, although you only have 100. Your profits would also multiply by 10, which would make them 5 USD. And having a 5% return from a single deal is actually more than impressive.
However, leverage is not all sunshine and rainbows. It comes with a lot of risks involved.
Why Leverage Can Be Bad
Leverage increases not only the profits but the risks too. In fact, the risks are multiplied by the same amount as the leverage itself.
For example, imagine that you had 100 USD, purchased GBP at 1.30000 and the price then fell to 1.29700. If you were not using leverage, you’d have lost 0.30 USD — a rather negligible amount of money. However, with 1:10 leverage, the risks would also be multiplied by 10 and you’d lose 3 USD.
How to Determine Safe Leverage
Forex brokers provide maximum levels of leverage of 1:1000 or even 1:3000. However, these are a little too extreme. Even the slightest market malfunction will knock you out immediately and you will lose your deposit.
Most professional traders consider 1:20 the maximum sane point of leverage for a normal market. Larger leverage is used only for abnormal situations, for example when the market is affected by an outside force.
Whenever the market begins to consolidate or range, all bets are off and the leverage should dialed back to 1:1. The risk of an erratic price movement is too high in these conditions. In fact, it’s better to quit the market altogether.
Conclusion
Leverage is necessary to make a living off Forex trading. Just don’t forget that it goes both ways and may hurt you if you get too greedy. Also, make sure that your Forex broker is reliable, since even a minute delay may cause a lot of damage when you are trading with leverage. For instance, JustForex offers good trading conditions, as well as full leverage range. The broker has good reviews on reputable sources.
The post How to Determine Safe Leverage on Forex Market appeared first on The Manila Times Online.