Managing the Risks of Leverage and Margin in Forex Trading

Sep 11 • Forex Trading Articles • 1363 Views • Comments Off on Managing the Risks of Leverage and Margin in Forex Trading

It has always been said that trading in the foreign exchange market holds no guarantees. You cannot possibly be absolutely sure that each and every trade that you enter into will be a profitable one. There are risks that you have to bear in your trading activities. Long-term profitability is all about managing these risks and trading with a proven strategy. One of the techniques of maximizing account profitability is using leverage and margin. This means that you do not have to have a lot of money in your trading account in order to trade in big amounts and reap greater profits.

The ideal scenario, however, does not happen all the time. As trading on leverage and margin effectively magnifies the size of your trading transaction, it can also magnify the losses you will incur in case the market turns around in the opposite direction of your trade. This is the biggest risk of leverage and margin in forex trading. When done wantonly, trading on excessive leverage can cause you to lose a lot of money on a trade or even zero out your trading account balance. The bottom line is, you do not have to risk as much in order to enjoy profitability.

To wisely manage your risks, you have to know what you are up against in the forex market. As the currency prices rise and fall, you want to be able to project that they will hit a certain level at a certain point in time when you are to implement your trade. Technical and fundamental analysis will help point you in the right direction, but there are still no guarantees as to the actual outcome of a trade. When all the positive indicators are present, the odds that your trade will be a profitable one are high. These indicators, and not leverage and margin, are the ones that tell you whether your trade is likely to be profitable or not.
 

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During these instances, those who do not have much in their trading accounts can take advantage of leverage and margin to pump up their potential gains without having to infuse more capital into their account. Going all in and putting the entire balance of your trading account is never recommended in any leveraged trade – getting greedy is also one of the known reasons why forex traders fall out of the trading arena. Opting for a moderately leveraged trade is one of the most prudent advices given to forex traders to hike up their trading power but at the same time safeguard them against losses they are not prepared to bear.

Most brokers that you will encounter will boast about the high leverages that they can offer forex traders. What you want to look for are not those that offer you the highest of leverages, but those that offer you some flexibility in the leverage and margin that you can choose to trade with. Do not be blinded by the staggering amounts that you can magnify your potential trading income. Stay grounded on your trading strategy and focus on making wise trading decisions in your currency pairs. When everything tells you that a particular trade is going to be profitable, up your ante by kicking up your leverage as well, but not to the point where it’s too high for you to manage.

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