Posted by Blyca on October 30, 2019
One of the reasons why forex is more lucrative (or even considered the best leverage for forex) to traders in comparison with other financial tools is that this market provides such a higher leverage than other markets. Whilst the word “leverage” may be conveyed by people, not many of them get fully knowledge about this as well as understand its working methods and the way it influences to traders’ profits.
In the forex market, using the money which is not yours to trade is not a strange practice. We hereby discuss how using loans to entering transactions can bring benefits and the reason why leverage may either make transactions loss or profitable. They are the forex pros and cons.
What is leverage?
Leverage means using loans to invest to something. In the forex market, loans are usually provided by brokers. High leverage is that a trader can set up and manage a generous amount of money as initial requirement for opening an account.
The following formula describe how a margin-base leverage is formed:
Margin-Based Leverage = Total Value of Transaction / Margin Required
But leverage for forex make no influence on the risk and the need to increase 1% or 2% of trading values because margin-base leverage does not affect the results of transactions.
The cause is that traders can assign more than the margin requirement for any transactions at any time. It implies that the real leverage for forex, not the margin-base one and it is a more powerful reference to earn and lose money.
Forex leverage – is it the best?
100:1 is the considerably high leverage offered in the forex market. To be clearer, when you have got 1,000 USD in your wallet the leverage allows you to make transactions up to 100,000 USD in the market. This is said that the reason why the forex market builders give this high leverage since leverage is a part of risks. In the case that accounts are controlled good enough, the risk will be controlled as well. If not, they do not provide the leverage. Besides, forex market is including huge money and high sense of liquidity, it is easier for trader to get in or get out their transaction at any level than other markets.
The very little change in currency quotes depending on the currency pairs are called pips. And in the forex market, traders watch for currency changes in pips. These changes are often just a small piece values of a cent. For instance, GBP/USD pair changes 1 pip, from 1.9500 to 1.9600. It means just 1 cent changes in the currency quotes.
This is the answer to the question why forex trading is always made in a considerably huge size. This makes every little change in minutes price turn out to be a big profit. Imagine that making transaction with the value of 100,000 USD, every small change can lead you to a huge success or failure.
Exceeding real leverage and its harmfulness
This is the disadvantage aspects of the best leverage of forex. Because the leverage can widen your losses or interests by the same amplitude, the higher the amount of your leverage on the value of your transactions, the higher the level of risk you must bear. You need to know that this kind of risk is not included in margin-base leverage, however it can impact if traders are careless.
In short, it is very difficult to say which is the best leverage for forex trading. Traders, in order to succeed, must get insight into the pros and cons of different types of leverage. Applying leverages properly make it possible for traders to enlarge profits as well as manage their risks. Next, learn about forex traders in India.