Advantages and disadvantages of leverage

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Trading

Posted By Gbaf News

Posted on March 15, 2012

Advantages and disadvantages of leverage

One of the greatest advantages of Forex trading is leverage provided by the broker. Currency trading using leverage is called margin trading.

Margin trading is widely used on Forex. It allows trading with borrowed funds. In other words, a trader pays only a small part of deal borrowing the rest from the broker.
Leverage increases the financial capabilities of traders and, as a consequence, the trading results. As a rule, leverage is provided automatically and can be changed at trader’s discretion. After a trading account is opened, a trader is able to manage the capital which exceeds his initial deposit. Leverage is provided free of charge on a permanent basis. However, a trader should keep a certain amount of money in the account to guarantee the margin. The margin requirements are set to limit the trader’s debt potential so he cannot lose more than he has. If a trader suffers losses equaling the margin, the broker is able to close the positions without trader’s permission.

Leverage can vary. For example, InstaForex Company offers from 1:1 to 1:1000 leverage. Only few brokers are able to provide their customers with such leverage size, but many traders need the largest leverage possible to suit their strategies.

Being very useful, leverage has its disadvantages and can work against the trader. So if the currency rate moves against your predictions, the leverage would amplify the potential loss. Choose the leverage that suits your trading strategy and test it on demo account. Leverage is a very useful tool in the currency trading.

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