Leverage is a trading tool offered by most forex brokers. It allows you to take a position on a currency pair with an amount much higher than the one available on his account. For example, with a leverage of 1 :400, you will be able to with only € 1,000 to take a position in the amount of 400 000 euros. The leverage this you it that benefits ? This is what we will see today.
An indispensable ally
If the forex is very liquid, it is not very volatile. The daily variations are, in fact, often less than 1%. With leverage, you have the opportunity to mitigate this problem. By integrating it with your trading plan, and applying management rigorous risk you can multiply your profit potential. Attention, however, the size of your positions, they must not exceed more than 2% of your portfolio unless you will not do swing trading and, in this case, it will take you just 1%.
A danger to watch out for
According to several studies, the intensive use of leverage can be detrimental to your trading performance. Generally, those who turn this financial instrument in success, are content with a lower lever 5. Beyond that, it turns against you. If your initial deposit is low, or if it is less than€ 1,000, it will be necessary to limit the number of positions to optimize the use of the leverage effect. Finally, keep in mind that the larger the size of the positions, the greater the leverage is, the greater is the amount of your losses can be a result.
In conclusion, leverage is a great tool for traders of the forex market but we should be wary a bit. Do not overdo it, and use the always with a money management effective.