In forex, leverage can be described as a loan given to a trader to enable them to trade with a larger capital than what they’ve deposited. Thanks to leverage, a trader can control a large trade size with very little capital.
Trading with forex leverage, also known as leverage trading, is advantageous as it can magnify your profits when the markets work in your favor. However, leverage trading can also amplify your losses if the markets move against you. That’s because losses, just like profits, are hedged against the total value of the trade, rather than just the amount you’ve deposited.
With that said, using leverage in forex makes it possible for retail traders with low capital to enter the market. In that sense, leverage is a great tool for beginners who don’t have a lot of capital to trade with.
Can You Trade Forex Without Leverage?
While leverage is a great tool for beginner forex traders, it’s still possible to trade without leverage. This is typically referred to as “no leverage trading.”
One of the downsides of no leverage trading is that it earns you low profits due to minuscule percentage fluctuations in currency prices. In other words, you need significant capital investment to make meaningful profits.
By contrast, leverage trading offers high returns even if your investment capital is low, as long as you manage your risk well. However, no leverage trading is advantageous because it limits losses if a trade doesn’t go in your favor. This is because you only incur losses on the amount you’ve invested and not on any borrowed funds.
Likewise, trading without leverage forces you to be disciplined and cautious when handling your trades. When you don’t have control over a large position, you’re more likely to exercise restraint in your trade. Cultivating this discipline can help you enjoy more consistent profits over time.
What Leverage Should a Beginner Forex Trader Use?
It’s not uncommon for people to use the highest leverage they can get when they first start trading forex. However, it is not advisable to do so until you’ve mastered the fundamentals of trading.
As a beginner, trading with high leverage can work against you in several ways. First, high-leverage trading without a proper strategy can quickly wipe out your account if you make a mistake setting up your trade.
Trading with high leverage forex brokers can also force you to overextend yourself when trading, which is not recommended if you’re still learning the basics of trading.
How Much Leverage Should I Use When Trading?
There is no definite amount of leverage that you should use when trading. You just have to choose the amount that you feel most comfortable with. Even so, it’s advisable to keep your leverage low when you’re starting out to minimize your risk.
Conclusion
Forex leverage allows you to make huge profits on trades that go in your favor. However, to get the most out of this incentive, you first need to learn when to take your leverage and how to use it.
0
0
