Should I Trade With A Large Leverage In Forex?
So you know what leverage is, but do you really know the implications that trading with a large leverage can have?
This is an unbelievably important subject when trading in the forex market. Overleveraging can lead to serious repercussions, and therefore it is imperative to understand how leverage works, and how much you should leverage your position.
So what is leverage?
Leverage is the amount you can (in essence) multiply the odds of your equity by, normally borrowing this ‘leverage’ from your broker. This means if the leverage your broker has offered you is 1:100, you can multiply your equity by x100, for example, £1000 x 100 = £100 000.
As great as this all sounds, you need to be careful that you don’t ‘overleverage’. Overleveraging is trading a too large a position size in respect to your available margin. Any negative move in the markets to your position may have massive implications to your margin due to an ‘over-leveraged’ position.
Many forex brokers offer very generous leverages; such as 50:1, 200:1, 300:1, etc. This can and has resulted in many traders losing a lot of equity very fast when the market moves slightly negative to their position.
Although it is also important to look at the positives of being able to leverage your position. If done correctly you can earn a much larger profit then if you were just to risk your equity without a leverage. Most forex markets tend to have relatively low volatility and therefore adding a leverage to your equity is necessary to make a larger impact in your trades.
The most important thing to remember only risk what you can afford to lose.
So, the simple answer is it is up to you how much you leverage. Just be careful not to overleverage as alluring as it seems. If you are confident in your trading plan, then sure, leverage your equity and see how it goes. Be careful not to get an negative equity balance with your broker – but most brokers tend to cut your loss when you reach a certain position against your margin.