The exchange of foreign currencies may seem complicated at first glance, but it is actually simple when you get the hang of it. Once you have decided that you want to break into the Forex market, choose a reliable brokerage firm to help you make trades and carefully analyze the world of the economy. Be on the lookout or trading positions, GDPs, and the political climates of the nations that you are planning to buy currency from. When it comes down to trading in the foreign exchange market, you have more control than you imagine. It is called leverage, in case you did not already know. Using financial leverage is particularly important for beginners because it enables them to take control of their positions with very little trading capital.
Financial leverage, defined
Since you are new to FX trading, chances are that you know every little about leverage and trading. If you spend your time perusing through online forums, you will no doubt come across this term many times. So, what exactly is financial leverage? To put it simply, it is the ability to borrow money from your broker to place more significant trades. You use credit to buy assets. Imagine the following situation: you have some money in your trading account. You notice that the Australian dollar is on the brink of rising in value, so you invest the entire balance in the Australian dollar. At the end of the day, the value of the American dollar falls in comparison to the Australian dollar. When you exchange your money and your profit is not that great. The reason why leverage is essential is that currencies can increase and decrease in value by a relatively small percentage every day.
What to look for in a high leverage broker
It is not hard to understand that financial leverage is a very appealing tool. Some brokers offer Forex trading accounts with high leverage. Attention needs to be paid to the fact that high leverage does not apply to all regions of the world. Currency exchange is subject to some limitations in the United States, as opposed to Australia and Europe that have no problem with leverage as high as 500:1. What is more, some brokerage firms offer various financial products, such as indices, bonds, contracts for difference, commodities, and even cryptocurrencies. The question now is: What should you be looking for when choosing a high leverage broker? Well, keep in mind the following aspects:
- Margin requirements – the margin is presented under the form of a percentage of the full amount. In the United States, the margin requirements are limited to 2 %. Some brokerage firms impose harsh requirements to limit the risk even further. Essentially, you do not need to use high leverage on all financial transactions. Yet, make sure to select a broker with limits you agree with. You will want to be able to trade with small amounts of leverage and make your way up to bigger deals.
- Support for trading software – a trading platform that is much too complicated to understand and difficult to navigate will not be of any help. Pick a platform that is simple enough, such as MetaTrader 5, and ensure you receive continued support from the brokerage firm. The broker should be on hand to help you.
Find online brokers that offer high leverage on your favorite currency pairs and take your time before making a decision. If you are trading with a broker from the United States, ensure they are registered with the Us Commodity Futures Trading Commission. The broker-trader relationship is based on trust and regulation can help build that trust. When dealing with any kind of financial product, you should trade with a regulated Forex broker.
How much leverage is right?
As a rule, professional traders trade with very low leverage in an effort to protect their capital and maintain consistent returns. You are new to currency exchange, so you do not know that a trade can go against you in a matter of minutes. If you were to trade with a high leverage, the outcome would no doubt be disastrous. Higher leverage generally translates into higher risk. Financial regulations have limited the leverage ratio that brokerage firms can offer to clients for good reason. A higher financial leverage implies using debt to finance assets.
Higher leverage is not necessarily risky. Forex brokers that offer high leverage often have a good risk management strategy in place, so the client does not end up losing all their money. Individuals have the opportunity to become involved in high-profit trades and earn consistent, large profits. Brokers in the marketplace know what to do to help traders increase their returns from Forex trading. As far as choosing the right financial leverage level is concerned, these are the rules you are required to follow:
- Avoid distress by maintaining low levels of leverage
- Take advantage of trailing stop-losses
- Do not risk more than 1% or 2% of your account value
The most important thing is to get the most value out of your investment. The brokerage firm may be able to provide additional learning materials. Do not rely solely on the information found on websites because it will not help you advance as a trader. Owing to high leverage trading, you can make profit with a relatively low capital, which is no little thing.
All in all, financial leverage is not a bad thing. It is incorrectly considered risky. Trading with high leverage does not necessarily result in loss, but individuals are convinced this is what happens. The truth is that, if used correctly, leverage can yield important results, enabling the trader to enter higher positions. The profits can be higher. The right leverage depends on your trading strategy and forecast of the movement of the foreign markets. Next time, consider using a leveraged market. You have the freedom to choose your own stop-loss for all positions. Without financial leverage, you can win or lose. With leverage, however, you win more than you lose. Keep that in mind.