Leverage In Forex: Is It A Bane Or A Boon?

Going into trade like trading foreign currencies can either be a bane or a boon.  You don’t just go into it wishing that you’ll earn extra money buying and selling currencies.  You’re going to need knowledge, knowhow and you’re also going to need to put a ton of effort into it.   It’s true that you can succeed in trading part time but that doesn’t mean that you’re guaranteed to live a wealthy lifestyle if you quit your job in return for trading Forex full time.  One important consideration when you decide to go into Forex trading is the leverage.

Your Money Leveraged in Forex Trade

When you trade in foreign currencies, your money is going to be leveraged.  That means that you can go past your capital in terms of trading.  Instead of just using something like $1000 of your money, you can trade up to $400,000.  You might be thinking that it something good.  You put in more and so you can earn more.  But what’s going to happen if you lose?  This is why you can think of leverage in Forex trading as a double edged sword.

If you go into trade with everything that you need like knowledge, the tools, a plan etc., you have a way of making this leverage work for you.  With just a small capital investment, you can make a huge profit. However, don’t get too excited about the prospect of earning huge profits. You have to be careful about leveraging your money to the maximum of 400 times because this is also how the losses pile up in Forex.  If you made the mistake of leveraging your money 400 times, this is going to take a lot to break even.  Mainly, you have to play all your cards right from here on out.

The Way Leverage Works

To give you a clear picture of what you’re getting yourself into with the leverage in Forex, here’s an example scenario.  As a new trader, you’re going to enter into a position in the trading market.  Depending on the size of the trade, you’ll have $ per pip with your currency pairs.  If you leverage your account at 1:100 and trade your 50,000 long of EUR/USD, if this currency pair moves up to 1.4350 from 1.4290, you will close your Forex trade at +60 pips.  This amounts to $300.

Remember that your account is leveraged and here, you just need to have $500 for your capital just to do a trade on your currency pairs worth $50,000.  With the 60 pip movement in the market for your currency pair, you made yourself $300.  It’s true that it’s a huge return for your investment pegged at 60% but what if the tables turn and you lose.

Leverage is mainly why you need to have your wits rolling all the time.  Without a plan, without a trade strategy that works for you, you can easily lose your investment together with the money you hoped to gain.  The way to achieve success in Forex trading would be to learn, get experience and really work hard for it.
 
This article is written by Melissa on behalf of 2nd Skies Forex.  Learn more Forex trading strategies at http://2ndskiesforex.com/.