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Harnessing the Potentials of Leverage and Margin Trading

Aug 12 • Forex Trading Strategies • 2006 Views • Comments Off on Harnessing the Potentials of Leverage and Margin Trading

Without a doubt, it is the huge leverage that retail forex trading provides which attract investors to dabble on it. But if we are to look at the common knowledge that 95% of retail forex traders are losing money on it, it is definitely concerning. It is also telling us that many of these traders are not able to harness the full potential of a highly leveraged trading. Instead of making it work to their advantage, it is eating them up.

We know by now that margin trading provides us leverage which can cut both ways, i.e. maximize our profit or magnify our losses. The only plausible reason why most traders are unable to use leverage to their advantage is that they do not fully realize all of its implications to actual trading.

More often than not, after being attracted by the huge profit potential that the highly leveraged retail forex trading has to offer, traders put a blind eye to the risks it entails when they start trading. This is highly evident among forex traders who do not incorporate prudent money management strategies into their trading plans.

Because you can never really tell when leverage can work for or against you, it is always best to cover yourself against the likely possibility that the price will work against you. Incorporating such prudent money management strategies makes allow you to harness the full potential of leveraged margin trading to your utmost benefit.

Here are some prudent money management strategies you can incorporate into your trading plans to avoid being cut off because of huge losses:

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  • Put a Stop-Loss Order to every trade you make. If the market goes against you and triggers your stop loss you will be out of the market automatically. This limits your losses only to the amount you are willing to absorb. It also leaves you enough margins to be able to trade another day or another session.
  • Set profit targets and put a trading stop at the corresponding price level. Traders wrongly adhere to the trading dictum that says you should let your profits roll. And so they will usually hang on to their positions too long which often rolls back into losses instead. Pocketing your profits whenever you can is the more prudent thing to do. You should never regret getting out at a profit even if the price continues on in your favor. Remember, a lost opportunity is really never a loss.

The above money management strategies allow you to control your trading without the need to regularly observe the position. But setting the stops can be an intimidating task for startup traders. Setting trading stops can be arbitrary and can work to your disadvantage. You need to have a sound basis for setting your stops. You don’t just pluck them from out of the blue and set them arbitrarily.

One of the best places to set your trading stops is on supports and resistances but you have to have a reliable method to determine or calculate supports and resistances and not rely on simply connecting tops and bottoms to draw resistance and support lines. This practice is also arbitrary and results in the wrong reading of the market. One of the best methods to help you to set your trading stops is with the use of pivot points. It will give more accurate stop loss points and profit taking targets for intraday trading.

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