The Pros And Cons Of Forex Trading Leverage

Leverage plays an important role in forex trading. In fact it's one of the main reasons why it is so popular. It basically enables you to trade positions that are far greater than the amount of money you have in your trading account. This sounds great but there are pros and cons to forex leverage.

Obviously the major benefit is that you can potentially make huge profits if you use high amounts of leverage and make consistent winning calls. However this is extremely risky and very hard to do because any short-term volatility may wipe you out completely.

In fact there are a lot more potential drawbacks to this seemingly generous offer of leverage offered by the various forex brokers. As you can probably guess the real beneficiaries of leverage are usually the brokers themselves who offer high leverage rates.

For example a lot of companies offer 1:200 leverage and I've even seen 1:400 being offered. This means that with a trading capital of just $1000 you can trade positions totalling $200,000 and $400,000 respectively. Now of course by leveraging yourself to such an extent it doesn't take a genius to work out that any position that moves against you could potentially wipe your account out very quickly.

The forex brokers know that statistically most traders end up losing money so by drawing them in with appealing leverage rates, they know that they will usually end up profiting from the traders they attract, particularly those traders that enjoy risking their money on highly leveraged positions. As I've already mentioned, it only takes a small move in price in these instances to wipe out these highly leveraged positions.

If you are looking to trade forex then leverage should not really be an issue in truth. Instead you should be more interested in looking for a broker that is fully licensed and regulated with the relevant authorities and one that offers a professional and good quality service. In other words they offer reasonable spreads, have a decent trading platform and good charting facilities, and are reliable even during the busiest times of the day.

If you can come up with a decent trading system then you can make substantial profits from forex trading without being highly leveraged. You should be looking to grow your account slowly and steadily which usually means only risking a small percentage of your capital on any one trade, ie no more than about 3%. This will allow you to keep losses small and manageable (providing you use sensible stop losses) and keep you in the game for long enough to make good returns. Leave the highly leveraged positions to the risk-taking gamblers.

About the Author

Click here to read a review of Forex Candlesticks Made Easy and to discover lots of free tips and strategies relating to forex currency trading including the exact 4 hour trading strategy that James Woolley uses to trade the markets.

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