One of the reasons why so many people are attracted to trading forex compared to other financial instruments is that with forex you can usually get much higher leverage than you would with stocks. In forex, investors use leverage to profit from the fluctuations in exchange rates between two different countries. While many traders have heard of the word "leverage," few have a clue about what leverage is, how leverage works and how leverage can directly impact their bottom line.
Leverage is the ability to use something small to control something big. Specific to forex trading, it means you can have a small amount of capital in your account controlling a larger amount in the market. The obvious advantage of using leverage is that you can make a considerable amount of money with only a limited amount of capital. The problem is, that you can also lose a considerable amount of money trading with leverage. It all depends on how wisely you use it and how conservative your risk management is.
Although leverage can increase your potential profits, it can also greatly exacerbate your losses. Carrying a large volume of trades with a low margin call can greatly magnify even the smallest pip movement. If your position continually loses value until you hit your minimum margin requirement, your broker will automatically close the trade to make sure you don’t lose more money than you put in. This is known as a margin call and depending on where your trade was closed, a percentage of your margin will be returned.
The simple answer is that the majority do not understand leveraging, or the risks involved. What this also shows is something we already know, that the masses are reactive, rather than proactive. To be proactive with your own trading, the first thing to do is what the masses failed to, which is to understand the risks and learn how to create a trading plan to manage them. Knowing how comes through getting a structured education and not in just reading the ‘what is’ about leverage.
The answer on the question is Leverage a Double Edged Sword is yes, but only for those traders who did not manage to reach a relevant level of trading education. Educated trader can limit the risk by using ‘Stop-Loss" rates. These rates are decided by the trader. You choose a rate that is the lowest you want to go. If the market reaches that rate, your deal is automatically stopped so you do not lose any more money. Because you set the rate, you can control your investment. You can make sure that you do not lose more than you are prepared to.
