Are you a Trader?
Then you need to learn about leverage.
Probably most of you know the term Leverage but not everybody really understands how it affects your trading. Leverage is a way for a trader to trade much bigger volumes than he would, using only his own limited amount of trading capital.
Leverage is the use of debt (borrowed capital) in order to undertake an investment or project. The result is to multiply the potential returns from a project. At the same time, leverage will also multiply the potential downside risk in case the investment does not pan out. When one refers to a company, property, or investment as "highly leveraged," it means that item has more debt than equity.
How to Manage Leverage Risk
So, while leverage can increase the potential profits, it also has the capability to increase potential losses as well, that is why you should choose carefully the amount of leverage on your trading account. But it should be noted that, even though trading this way require careful risk management, many traders always trade with leverage to increase their potential returns on investment.
It is quite possible to avoid negative effects of Forex leverage on trading results. First of all, it is not rational to trade the whole balance, i.e. to open a position with the maximum trading volume. Apart from that, Forex brokers usually provide such key risk management tools as stop-loss orders that can help traders to manage risks more effectively.
Here are the basic points to manage the leverage risks properly:
- using trailing stops,
- keeping positions small
- and limiting the amount of capital for each position.
So, Forex leverage can be used successfully and profitably with proper management. However, a trader should take into account that a highly leveraged trade can quickly void a trading account if the market changes direction.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.