Leverage in Forex trading is a tool widely used by virtue of its main feature: the ability to exponentially increase profits. However, it is a double-edged sword, which can cause a lot of damage to those who use it improperly. That is what leverage is in currency trading, how it is used, the pros and cons.
Leverage: what it really is
Officially, leverage was created to allow investors to speculate with greater intensity than is allowed with the capital they have. It was later integrated by brokers, who then helped bring leverage in Forex trading.
But what is it specifically?
It is the tool that allows the operator to move large numbers despite a low initial investment. The ratio between displaced capital and real investment is represented by a ratio. If the leverage has a ratio of 1:10, for example, and the operator invests 1, you will get a profit as if you were investing 10.
Unfortunately, this also applies to losses. So you can see why leverage is a double-edged sword: it increases potential gains, but in the same way, it also increases potential losses.
How to use the leverage
Many brokers announce the possibility of using leverage. Often, the emphasis is placed on the possibility of winning, while the possibility of losing (and so much) is given little space. Of course, everything is logical, since it is about marketing. It is not so logical, however, that the operator uses leverage recklessly, regardless of the consequences.
As in all things in life, and trade is no exception, it is necessary to proceed in moderation.
The leverage is fine, as long as it is not extremely high. The perfect leverage is 1:10, although conventionally leverage of 1:50 is also bearable. However, if the operator has special experience, nothing prevents him from trying even high levers. You can even see 1: 600 around.
Some platforms and brokers allow you to use super-high leverage. There is but to distrust. Instead, it is better to choose between a regulated and safe broker.
However, it is always good to associate the use of leverage with the positioning of a stop loss. In this way, regardless of leverage, the operation will stop when a certain loss is reached. Obviously, you need to make all necessary evaluations about your financial possibilities and your economic tolerance threshold. It is understood that the broker does not allow losses higher than those in the account.