Did you know that in trading there is the leverage that can determine your trading results? This leverage can be a great advantage to traders if used carefully as it is like a doubled-edge sword that can make your trading account gain profit but also lose exponentially. Put it simply leverage is where you trade using borrowed money or funds to boost the growth of your account. Below here, you will find a further explanation of leverage.
Leverage Trading
To know leverage trading, we first have to understand what leverage is in trading. From what Hayes (2022) wrote, leverage is where you are trying to amplify the result of your trade by using borrowed funds. Amplifying the result of your trade means that you can amplify your profit (also the loss) that may incur to your account. This means that traders can gain more than what they originally invested but can also lose more than what they originally invested.
Further explanation can be seen from Dicks (2010, p. 23), he explained that using 1:100 leverage means that you control a $100,000 lot with $1000 on margin in the account. Controlling a $100,000 lot with $1000 is really a great advantage and convenient if you know how to use the leverage that is provided by the brokers properly. However, do remember that leverage trading is a high risk, it would be best to use it wisely than to use it with your gut feeling.
Advantages And Disadvantages Of Using Leverage Trading
Certainly, the advantages of using leverage trading are explained by Dicks (2010, p. 23) where traders can control big amounts of money with less margin in the market. This means you are only required to have a small amount of money in your account to trade a larger position just like the previous paragraph where 1:100 leverage means you can control a $100,000 lot with only $1000.
Another advantage besides only requiring you to have a small amount of money is that with leverage you can amplify your profit because you are using the borrowed fund to open a larger position (just like you can see in the image of this post), so if the position you have opened before is in profit, then, you will see that it is faster to accumulate money with leverage than with not leverage.
However, with the fast feature to accumulate money, there is also peril when a loss occurs. Dicks (2010, p. 23) said that a lower margin can induce traders to risk more than is wise. Of course, what he means that is connected to our human beings is greedy behavior where we want fast money, so when greed overcomes our rational mind we would then behave according to our greed such as raising our lot position or even changing into high leverage trading without caring much about risk management which eventually usher your money to the market.
Conclusion
Leverage trading is where you trade by using borrowed funds that are usually provided by brokers. Leverage in trading is varied such as 1:100 or even 1:500. High leverage means that you can open a larger position than what you invested originally in your account. With leverage, you can amplify the result of your trade, either profit or loss. If used properly, you can generate money faster than you trade without leverage. However, if not used carefully, it can invite your greedy behavior and disrupt your trading psychology eventually destroying your forex account gradually.
Written by Andre I.
References
Dicks, James. 2010. Forex Trading Secrets: Trading Strategies for the Forex Market. New York: McGraw Hill.
Hayes, Adam. 2022. Leverage. Retrieved from Investopedia. (Accessed 17 April 2022): https://www.investopedia.com/terms/l/leverage.asp