One of the most crucial steps of learning how to trade forex is to learn about the market itself. The reason for this is that the intricacies of the forex market have the potential to financially ruin a forex trader, unless he learns how to handle them.
As you read more and more about forex trading, you will realise how the foreign exchange Sydney market is different from all other types of investment markets. One of the differences that you will come across would be leverage.
It is imperative that you, as a trader, not only understand what leverage is and its pros and cons but also the right way to use it in your trades. Leverage, if used in the correct manner, can take a mediocre trader and turn him or her into a resounding success. Here is all you need to learn about leverage and its use on the foreign exchange Sydney market.
What Is Leverage?
Leverage, in the simplest of terms, is borrowed money. Leverage is usually offered by forex brokers in terms of a ratio. The maximum leverage available in the forex market is to the tune of 400 to 1. This means that if a forex trader invests 1, 000 American dollars into his account then he would be able to invest up to 400, 000 American dollars on the foreign exchange Sydney market.
What Are the Advantages of Leverage?
It is important for a forex trader to realise the importance of leverage when it comes to trading on the foreign exchange Sydney market. Using leverage would allow you to increase your purchasing power considerably. As mentioned earlier, a leverage ratio of 400 to 1 would mean that you would be increasing your purchasing power by 400 times.
Most traders enter the foreign exchange market with a small account balance because not everyone can afford huge sums of money. Therefore, in a way, leverage makes the foreign exchange accessible to people who cannot cough up the required sum of money by themselves.
What Are the Disadvantages of Leverage?
While the benefits of leverage can never be undermined by any argument, it use has downsides as well. Leverage allows forex traders to increase the scope of their profits. Unfortunately, its use also means that the risks on the foreign exchange Sydney market become more potent for the trader in question.
What Is a Margin?
The concept of margin is closely connected to leverage. It is the amount of money that a trader is required to put up to gain whatever leverage he has chosen. For instance, if a forex broker’s margin policy is 1 percent then the trader would be required to put up 1, 000 American dollars so as to play with 400, 000 American dollars on the foreign exchange.
How to Use Leverage
Using leverage is like walking a tight rope. A trader should never use leverage above 100 to 1. In fact, many experienced traders only recommend leverage use between 20 to 1 and 50 to 1 because it minimises the incremental risk brought about by the use of leverage while, at the same time, offering good profit opportunities.