TIPS FOR USING LEVERAGE IN FOREX TRADING
TOP FOREX LEVERGE TIPS
While the prospect of generating large profits without putting down a lot of your money might be a tempting one, constantly remember that an excessively large level of leverage could lead to you losing your shirt and much more. A Couple of safety measures used by professional traders may help mitigate the inherent risks of leveraged forex trading:
TOP 5 TIPS FOR FOREX TRADING WITH LEVERAGE
1. Cap Your Outcomes.
If you aspire to take big gains seasonally, you must first learn how to keep your losses small. Cap your losses to within manageable limits until they get out of hand and drastically erode your equity.
2. Utilize Strategic Stops.
Strategic ceases are of extreme importance in the around-the-clock forex market, where it is possible to go to bed and wake up the next day to find that your position has been negatively impacted by a movement of a couple of hundred pips. Stops may be used not simply to ensure that losses are restricted, but also to shield profits.
3. Don't Get In Over Your Head.
Do not attempt to escape from a losing place by doubling down or averaging down on it. The largest trading losses have happened because a rogue dealer stuck with his guns and kept adding to a losing position until it became so big, it was unwound at a catastrophic reduction. The dealer's perspective may finally have been appropriate, however, it was normally too late to redeem the circumstance. It's much better to cut your losses and maintain your account alive to trade another day than to be left hoping to get an unlikely miracle that will reverse a huge loss.
4. Use Leverage Suitable to Your Comfort Level.
50:1 leverage means that a 2% adverse move could wipe out all your equity or margin. If you're a comparatively careful investor or trader, use a lower degree of leverage that you are comfortable with, perhaps 5:1 or 10:1.
5. Understand You Trading Psychology
Understand you mindset and ensure you are not over trading or revenge trading during your time in the market. Poor trading psychology with high leverage is risky business.
Trade the Way That Suits You
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LEVERAGE EXPLAINED
Let us assume that you're a forex trader based in the U.K. and have an account with an online forex broker. Your agent provides the maximum leverage permissible in the U.K. on major currency pairs of 50:1, which means that for every dollar you set up, you can trade $50 of a significant currency. You put up $5,000 as margin, which is the collateral or equity on your trading account. This suggests that you could initially place a maximum of $250,000 ($5,000 x 50) in money trading positions. This sum will obviously fluctuate based upon the gains or losses which you generate (note: the cases below are gross of commissions, interest, and other fees ).
Trade amount
EUR 100,000 Assume you pioneered the aforementioned trade once the exchange rate was EUR 1 = USD 1.3600 (EUR/USD = 1.36), as you are bearish on the European currency and expect it to decline in the long run.
Leverage
Your leverage inside this transaction is just over 27:1 (USD 136,000 / USD 5,000 = 27.2).
Pip Value
Considering that the euro is quoted to four places after the decimal, every"pip" or basis point move in the euro is equivalent to 1 / 100th of 1% or 0.01% of the amount traded of the base money. The worth of each pip is expressed in USD, since this is the counter currency or quotation currency. In cases like this, based on the money amount traded of $100,000, every pip is worth $10. (If the amount traded was $1 million versus the USD, each pip will be worth $100.)
Stop-loss
Since you are testing the waters with regard to forex trading, then you decide on a tight stop-loss of 50 pips on your extended USD / short EUR position. Gain / Loss: Luckily, you have beginner's luck, along with the euro drops into a level of EUR 1 = USD 1.3400 within a couple of days once you initiated the transaction. You shut out the position for a gain of 200 pips (1.3600 -- 1.3400), which translates into USD 2,000 (200 pips x USD 10 per pip).
Forex Trade Analysis:
In traditional terms, you sold short $100,000 and received $136,000 on your opening transaction. When you closed the trade, you purchased back the euros you had shorted at a cheaper rate of 1.3400, paying $134,000 for $100,000. The difference of $2,000 signifies your gross profit.
Impact of Leverage: By utilizing leverage, you could create a 40% return on your initial investment of $5,000. What if you had only traded the 5,000 without having any leverage? In that case, you would only have shorted the euro equivalent of $5,000 or $3,676.47 (USD 5,000 / 1.3600). The significantly smaller amount of this transaction means that each pip is simply worth USD 0.36764. Closing the short euro position at 1.3400 would have therefore caused a gross profit of USD 73.53 (200 pips x USD 0.36764 per pip). Using leverage thus magnified your yields by exactly 27.2 occasions (USD 2,000 / USD 73.53), or the amount of leverage employed in the trade.
Choosing your Leverage Amount
With leverage up to 500:1 available in certain areas, IC Markets customers can decide on the level of leverage that's suitable for them. Leverage can be altered through the MT4 platform prior to placing a trade, or via your personal preferences from the IC Markets Client Portal.