Forex traders can use leverage. This term refers to the use of borrowed funds from a broker to increase the potential return on investment. Using leverage, a trader borrows additional money to invest in excess of his own capital. Thus, the investor gets the opportunity to increase their potential profits. The fact is that the return on investment is calculated on the basis of the entire amount, including borrowed funds.
Leverage has risks. If the investment turns out to be unprofitable, the trader still returns the funds borrowed from the broker. This may result in losses. Using leverage increases the degree of risk. Even minor changes in the value of assets can have a big impact on the overall financial situation.
Leverage is usually referred to as a ratio. It shows how many times the borrowed funds exceed the deposit. A deposit, but also a margin, is the amount that a trader must deposit in order to use leverage.
For example, there is an account with a leverage of 1:20. The trader makes a deposit of $1000. He can now leverage $20,000. That's what leverage is for. With it, you can significantly increase the potential profit. The reverse side - along with this, the risks increase proportionately.
When using leverage, a trader is limited by its coefficient. A trader can choose between 1:1 and a maximum ratio, such as 1:100. However, the most easy-to-calculate values are often used.
Most common leverage ratios:
In addition to these values, others can be used. For example, 1:33. However, they are not so convenient in calculations. With a leverage of 1:10, it is easy to calculate the potential income. With a leverage of 1:33, the task becomes a little more difficult.
Also, the amount of leverage depends on the market. Countries may limit the amount of leverage. The type of market also imposes its own characteristics. For example, on the currency exchange, 100,000 units of the base currency, such as the euro, are bought at once. Because of this, a trader needs to have 100,000 euros in the account to start trading. This is where a large leverage comes in. With it, you can trade for 100,000 euros with a deposit of 1000 euros.
In Forex trading, leverage plays an important role. It allows traders to manage larger amounts of money than they have in their account. Thanks to this, the trader has the opportunity to increase his potential profit.
The main advantage of leverage is its main disadvantage. By increasing the potential profit, the trader proportionally increases the potential risks. That is why it is necessary to use leverage with the utmost care and understanding of all risks.
When using leverage, it is worth paying attention to the risk management strategy. Since the use of leverage allows you to free up part of the trader's capital, you should take advantage of this. A good way to mitigate risk is to diversify, use low leverage and stop losses.
In addition, you should choose reliable and regulated brokers. They must provide adequate trading conditions and information about the risks associated with the use of leverage.
Restrictions on leverage ratios in different countries may vary depending on the financial system and regulatory policies. Here are some examples of leverage restrictions that may exist:
Traders should check local rules and regulations before using leverage in the financial markets.
Scammers can use leverage to suit their interests. This may present risks for traders. Let's deal with the popular tricks of unscrupulous brokers.
Scam brokers can offer very high leverage, luring traders with promises of big profits. Fraudsters may hide important details or provide biased information about possible losses associated with the use of leverage.
Unscrupulous brokers may include hidden fees and conditions in their leverage agreements. This may include high interest rates on borrowed funds. Or hidden fees that increase the trader's costs and reduce his potential profit.
Some dishonest brokers can manipulate the prices in the market. When using leverage, this has a proportionally greater effect. This may include price distortion or programmed trades designed to unfairly benefit the broker at the expense of traders. As a result, a trader may face a loss of confidence in the market and financial losses.
It is important to be careful and choose reliable and licensed brokers with a good reputation. Before opening an account or using leverage, traders should carefully study the conditions and policies of the broker, as well as read the reviews of other traders. This will help to avoid problems associated with unfair practices of brokers and protect your interests in the financial markets.
Leverage is a flexible tool that is useful in the arsenal of an experienced trader. However, careless handling of it can lead to huge losses. Therefore, novice traders should get comfortable with it on a demo account. In addition, you need to remember - you can and should use Forex leverage only together with a risk management strategy.