Leverage in Forex can be a blessing or a curse

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Leverage in Forex can be a blessing or a curse

In the foreign exchange markets, leverage typically could be as high as 100:1. It implies that if you have $1,000 in your account, your trade value could be as much as $100,000. Several traders are of the opinion that forex market makers provide extremely high leverage but it happens to be a risk function. They are aware that if the account is managed well, the risk can be mitigated, otherwise, they would have no reason to offer the leverage. Additionally, given the fact that the spot cash forex markets are huge and highly liquid. This makes it easier to enter and exit a trade at the required level. Visit dubai trading

In trading, we keep an eye on the currency movements in pips, which is the smallest movement in currency price. This movement is heavily dependent on the currency pair. These movements are essentially only fractions of a cent. For instance, if a currency pair such as the GBP/USD moves 100 pips from 1.9500 to 1.9600—it would just be a single cent move of the exchange rate.

This is the reason why currency transactions should happen in sizable amounts which allow minute price movements which are accumulated and turned into greater profits when boosted with leverage. If you deal with $100,000, minute price changes could lead to major profits or losses.

Risk of too much leverage

Real leverage could potentially boost your profits or losses equally. The more leverage you use on the capital, the more risk you’ll face. Bear in mind that risk may not always be related to margin but may also be triggered if the trader isn’t cautious. 

Example

Trader A and Trader B have a trading capital of US$10,000 each. They trade with a broker who demands a 1% margin deposit. After carrying out some analysis, both traders believe that USD/JPY is peaking and would soon fall in value. Hence, they choose to short the USD/JPY at 120.

Trader A goes on to apply 50 times real leverage on this trade by shorting US$500,000 worth of USD/JPY (50 x $10,000) on the basis of their $10,000 trading capital. Since the USD/JPY stands at 120, a pip of USD/JPY for a single standard lot is roughly worth US$8.30, so a pip of USD/JPY for five standard lots would be roughly worth US$41.50. If USD/JPY increase to 121, Trader A would end up losing 100 pips on this trade, which will be the same as the loss of US$4,150. This single loss would amount to 41.5% of their overall trading capital. Know more 2023

Trader B acts more cautiously and chooses to apply five times real leverage on this trade by shorting US$50,000 worth of USD/JPY (5 x $10,000) on the basis of their $10,000 trading capital. That $50,000 worth of USD/JPY would be the same as just one-half of a standard lot. If USD/JPY increases to 121, Trader B will lose 100 pips on this trade, which would amount to a loss of $415. This single loss will account for 4.15% of their total trading capital.