The money borrowed from Forex brokers in order to hold high-value trades is called leverage. As a Forex trading beginner, you might not have enough capital to invest in a $10,000 trade. But with some leverage lent by your broker, you need only invest a quarter of that amount with the rest being covered for you! What this does, is essentially lets you profit without risking too much of your trading capital. When you win a leveraged trade, you will win massively!
There is a catch, however; leverage isn't all fun and games. Should it backfire, the losses you incur will be unmanageable. Consider this example, you want to place a very lucrative EUR/USD exchange of $10,000, but you don't have enough capital for it. So you borrow around $8,000 from your broker and invest the remaining $2,000 from your own pocket. Should you win this trade, you will win the full $10,000, meaning a whopping $8,000 profit. Now if you lose this trade, you lose $10,000 - that's the catch.
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| Pros and Cons of Leveraging in Forex Trading |
Leveraging in Forex trading is a win-lose scenario, where if you win, you win big if not, you lose bigger. Leveraging has to be done with caution and in safe ratios; going overboard will lead to losses far beyond one's affordability! Here are some of the pros and cons leverage brings along:
Pros of Leverage Trading:
1) As a Forex trader, one of the biggest limitations you will face is in terms of capital. You might run out of money when a good trade shows up! But with leverage, that will never happen. Amounts as low as a few hundred dollars will be ample to fuel your high-value Forex trading deals.
2) There is no additional interest charges applied on the borrowed money! You can work with leveraged capital without paying a single dime more than just the money lent.
3) The final, most evident benefit of leverage is that it exposes you to profit like nothing else. Even with small amounts of money, you can make mammoth returns on each leveraged trade.
Leverage Trading Cons:
1) A double-edged sword, leveraging improperly will leave you incurring losses irredeemable. The money you aim to bag will itself come back as loss!
2) There is no guarantee of safety with leverage. Even if you have stop orders in your Forex trading strategies, your trades can derail in a moment's instance.
As you spend a good few months Forex trading in Malaysia, you will gradually come to understand the subtle nuances of leveraging. From harrowing risks to jaw-dropping profits, a lot can be made, but to ensure you see more positives than negatives, you'll need the backing of a good broker! Partner up with WesternFX today. Assisted by our seasoned professionals, you'll master leveraging swiftly. Call us today to know more!
