Leverage is a very familiar concept in the field of corporate finance, it is related to the use of debt in business activities, in order to maximize profits for the business. And in financial investment, leverage is also an extremely important factor, this tool can help investors earn more money than their capital in a short time but can also make All that capital is lost quickly. That is the duality of leverage.
Watching: What is Leverage?
In this article, kienthucforex will go with you to clarify all the most basic issues about leverage and leveraged trading on the forex market, the most attractive financial investment channel today. .
Leverage rate depends on the trading platform
This regulation only exists in a few forex brokers, but it is not common.
For example, the maximum leverage used when trading exotic currency pairs on MT4 and MT5 platforms is different for professional account types on FXTM (like ECN, ECN Zero or ECN). FXTM Pro). On MT4 platform, the maximum ratio is 1:100 while on MT5 it is 1:200.
Or, at Exness, all account types, if trading on the MT4 platform, can use a maximum leverage of 1: unlimited (with conditions), but if trading on the MT5 platform, it is limited. at 1:2000 scale.
Leverage rate depends on other trading conditions
This is also a very special regulation, which only exists in a few forex brokers. Typically Exness, traders are only allowed to use 1: unlimited leverage if they meet some of the following conditions: have completed at least 10 orders (closed orders, not counting pending orders), trading translate at least 5 lots. If these two conditions are not met, the trader can only trade with a maximum leverage of 1:2000.
Advantages and disadvantages of leveraged trading in forex
Optimize profit on small capital
This is the most obvious advantage of leverage. With a small initial capital, investors can completely trade positions with much larger value. This also means that instead of paying in full for a transaction, you only need to pay a fraction of the value of the transaction. Therefore, leverage is not only advantageous for small traders with little capital, but it is also an extremely useful tool for professional traders.
The cost of using leverage in the forex market is the swap swap. However, this fee will only be paid when the investor holds the order overnight and the amount to be paid is also very low. Moreover, there are a number of trading products, in each certain Long, Short position, the trader will receive swap instead of paying the broker.
The biggest disadvantage of leverage is the risk factor, which amplifies losses. Leverage increases profits by many times if the trade is successful, it will also amplify the loss by many times if the trade fails. The higher the leverage ratio used, the greater the risk.
How much leverage should be used in forex trading
?Given the nature of the forex market, of course, there is no “should or should not use leverage?” rather than “how much leverage should I use?”
Firstly, if you are a person who likes safety, leverage, whether high or low, will not be suitable, so the forex market is not for you.
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Conversely, if you like to take risks, the forex market is very suitable, but how much leverage should be used depends on many different factors such as experience, capital and profit goals.
If you are a new trader, with little capital and inexperience, you should use a low leverage ratio. This is a way for you to experience the trading conditions that the forex broker offers, get acquainted with the market, practice trading methods and strategies without fear of taking high risks. With a small initial capital and low leverage, you will be able to minimize risks in the best way.
In forex trading, there is no specific rule as to whether a leverage ratio is high or low. For a person with a low risk tolerance, 1:100 is also too high, but for a person with a high risk tolerance, 1:500 is still normal.
With our experience, we rank ratios from 1:500 and above as high leverage, friends, new traders should only trade with a leverage ratio of no more than 1:100.
In contrast, for professional traders, they have a higher profit target, they have enough experience to deal with market fluctuations, they have an effective trading strategy, so they can use a Higher leverage ratio to reach profit target faster.
Effective risk management strategies when using leverage in forex trading
Always set stop loss and take profit
You know, leverage makes profits increase many times, but if you lose, the amount of money lost will also increase accordingly. If you do not set a stop loss, will you? promptly close the order when the market goes against the predicted trend or will he hesitate, thinking that it will quickly go right again? If you are lucky, you can reverse the situation, if not, you will lose more money. Stop loss will limit the loss to a fixed level, this helps limit losses in case the price goes against the predicted direction and fluctuates greatly, making it impossible for you to close the order in time.
Set a profit target for each trade by setting take profit. Be satisfied with the amount of profit achieved, don’t try to “eat a little more”, the market will never please anyone.
Use reasonable leverage, combine small trading volume
With leverage, you can trade orders with a larger value than the capital in your account, but that doesn’t mean you can comfortably place large orders. With a fixed leverage ratio, the larger the volume traded, the larger the deposit, the greater the profit, but also the higher the risk. To determine the trading volume in this strategy, you can apply some effective capital management techniques such as the Kelly formula or the 2% trading rule of professional traders…
Hopefully, with what kienthucforex shared in this article, you have a better understanding of leverage, how it works in the forex market. To choose the most suitable leverage ratio, you should clearly determine the factors of your needs, profit goals, risk tolerance, trading experience and capital. At the same time, do not forget to apply effective risk management strategies to minimize the risk that leverage brings.
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