3 Things to Know About Leveraged Forex Trading

Leveraged trading uses borrowed capital to invest it in a stock, currency, or security. The concept of leveraging is quite common when it comes to forex trading. Investors can trade in larger positions in a certain currency by borrowing money from a broker. This results in returns from favorable and profitable currency exchange rates.

However, some of the best forex mentors suggest that this concept is a double-edged sword because you can lose your capital investment if you fail to use any risk management strategy or manage the leverage. Let’s discuss some important things about leveraged forex trading to give you a better idea about the concept.

1. Kinds Of Ratios

The starting ratio of the profit margin will vary based on your broker and the size of the trade. If a trader is trading forex worth $100,000-EUR/USD, the broker may require $1000 as a margin. This makes the margin requirement $1000/$100,000 or 1% of the forex trade.

Common leverage ratios include, 2% or 50:1 ratio, 1% or 11:1 ratio and 0.5% or 200:1 ratio. The lower the margin requirements, the higher the leverage for every trade. However, a broker can always demand higher margins depending on the currency being traded.

2. Trade Size

Brokers may require different margins for larger trades against smaller trades. The 100:1 ratio means that the trader is required to keep at least 1% of the total trade value as collateral. Leveraged trading in the forex market is significantly larger than the 2:1, which is provided on equities, and 15:1 for futures.

3. Risks Of Leveraging

While traders gain the ability to generate greater profits through leverage, the risks are equally substantial and can also work against traders. For instance, if a currency moves in the opposite direction of what you initially predicted, the leverage can amplify your potential losses significantly.

A laptop showing stock market fluctuations.

To avoid losing a majority of the investment, traders need to implement strict strategies such as stop-loss orders. A stop-loss order is an order with the broker to exit the trade at a certain price point to avoid risking the investment on a trade. The trader can significantly minimize the losses on larger trades through this strategy.

If you’re looking to make successful trade decisions in the forex, crypto, and stock markets, our online mentoring platform can help you out. Trading Mentor’s online trading training courses are taught by some of the best trading mentors from across the globe.

You can choose a mentor based on their rating, locality, price, and experience. We also offer traders an opportunity to join our team and mentor other traders looking to start their trading careers. Contact us today to learn to trade stocks, forex, crypto, and more!

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