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Trading on high leverage is a double-edged sword – you can get huge profits or deplete your trading account. Leverage refers to the ability to open a large position with little of your own money. It’s expressed in ratios such as 50:1, 100:1, and 200:1 depending on the Forex broker. For example, you can control $100,000 position with $1,000 in your account using a leverage of 100:1. It’s worth mentioning that some brokers offer unlimited leverage to lure more traders in the foreign exchange market. Whether you’re a beginner or a professional trader, you should understand the pros and cons of trading with a best high leverage forex broker. Read on and learn more!
Pros
High leverage allows traders to open large positions with borrowed funds. Some of the benefits include:
- High profit
When high leverage works in your favor, you can make a fortune with a small trading account. This can make you think you’re the best trader that ever lived. Suppose you want to buy a currency pair like EUR/USD using a leverage of 200:1 and it moves 50 pips in your favor, you can generate a considerable amount of return. This will help you boost the trading account. Keep in mind high leverage works best for experienced traders who have an idea of proper risk management.
- Remedy for low volatility
The foreign exchange market offers different levels of volatility depending on the currency pair in question. It’s also influenced by economic events. When there is low volatility in the market, high leverage can be very rewarding. This happens when there is less activity in the market, especially during public holidays. Most of the cross currencies move just a few pips which means you can open large positions with little capital and reap big. It’s the same case when the market is ranging. You can mitigate the throttling effect to make more money. The currency pair you choose will depend on your trading experience.
Cons
High leverage can damage your odds of success by swallowing a large portion of your trading capital if you enter the wrong trade. Some of the disadvantages include:
- Distorts the probability of your trade being successful
A broker will not tell you that high leverage affects the transaction costs like commission and spreads. In their absence, your probability of success is close to zero. For example, if you were to enter a trade aiming for a 50/50 win you’ll realize the costs shift the odds against you. Also, they will eat your margin if you hold the positions overnight. It’s unfortunate that some brokers offer the same transaction costs and supporting margin on each trade. This means regardless of your strategy, the trade will be closed almost immediately. Because high leverage can backfire, experienced traders use stop and limit orders to minimize the losses.
- Can lead to margin call
A margin call is the trader’s worst nightmare. It occurs when using high leverage and holding a losing position for too long. Let’s look at a practical example. If you have a trading account of $5,000 and you enter a position with leverage of 200:1, you need a few pips to be stopped out. What if you open another position and the currency pair drops to 100 pips? Your position will be instantly liquidated and you’ll get a margin call. This is how leverage is a top killer to Forex traders. If you apply low leverage on each trade, you’ll have more breathing space of setting wider stops and avoid losing your capital.
- Leverage is a liability
Whether you make a profit or loss when trading currencies, the cost of leverage will apply in your trading account. If you’re well conversant with the financial markets, all borrowed funds must be paid back with interest. The cost of leverage is calculated based on the existing positions and how long you hold them. As you use high leverage bear in mind that you have to meet the demands of your broker at the end of the day.
Final thoughts
Leverage is a powerful tool that gives the flexibility to open large positions and maximize profit with a little capital. Any experienced trader will tell you there are many firms that allow traders to use high leverage. This increases the probability of losing on a trade. Additionally, they take advantage of the hidden overnight charges. While both technical and fundamental analysis is important to your
trading success, you should always safeguard your account. If you’re a beginner, you should use low leverage to develop proper risk management techniques. But if you’re an experienced trader, you can open an account with a high leverage Forex broker.
