High Leverage - Advantage Or Disadvantage?

source: EzineArticles

Basically, leveraging in Forex involves loaning the broker certain amount of money to help you achieve high value trades. It is one of the most common trading strategies used in the Forex market. With this trading strategy, you can place high value trades even if you don't have that money in your account. 

This actually gives you high leverage in the market even if you have little funds in your account. The leverage is expressed in ratios for example your Forex broker can offer a leverage of 1:200, 1:400, 1:500 etc. This trading strategy is both advantageous and disadvantageous making several market experts to have divided opinion about it.

The most essential benefit of high leverage is the ability to become highly profitable in the market. A trader has opportunity to be highly profitable by using only little funds in the account. By using high amount of leverage, a trader can potentially make lots of profits and consistent winning calls. Due to leverage, a trader needs not to funds his account with lots of cash to make huge profits. You can actually use little funds in your account and make high value traders as those with lots of funds.

With high leverage, a Forex trader only requires little capital to fund his account. We all understand that not every potential trader would raise the amount required to start trading. Forex trading requires lots of capital to start making profitable trades and this might bar many people out of the market. Leverage can be considered as loaning from the Forex brokers to make high worth trades. In addition, people new to Forex trades would rather prefer to start with low capital.

Another benefit of using leverage is the opportunity to loan your Forex broker without paying any interest. This is contrary to other financial institutions that loans their customers at high interest rates such as banks and mortgage firms. Most Forex brokers would lend their customers up to 99% of their total investment at no interest at all. For example, if you want to invest $10,000, you only need to deposit $1,000 and the broker ill provide the rest at no interest.

Although high leverage is good and it can make you highly profitable, this method also puts you at a higher risk position. In fact you can even loss all you investments by just making a single highly leveraged trade. In particular, everything that can make highly profitable in the market can turn against you and you end up with series of losses. High leverage in particular places your funds to higher market risk. This is why most people think against it even though it has potential of making them highly profitable.

Leverage is severely affected by the movement currency value. For example if the currency weakens to an extreme low value, there is high chances of losing greatly when using high leverage. The level of risk is so much high as compared to when leverage is not being used. This is because the trader makes high investments when using high leverage. This is why most expert traders usually think against this trading strategy.

It is true the leverage strategy can make the trader highly profitable in the Forex market. However, it is highly risky and the trader can end up making huge losses. In fact it can be concluded that most Forex brokers statistically understands that most traders would end up losing when using high leverage. That is why they can afford to offer highly lucrative leverage to win more customers. To be on the safe side of Forex trading, it is important that you pair leverage with some risk reduction measures.