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Traders make use of leverage in Forex trading to increase their profit. The purpose of leverage is that a trader can gain quick returns in the small price changes associated with this type of trading. Thus, the traders can make a reasonable profit from even the smallest pips in the exchange rates.
There is also the option of trading with high leverage. The broker with whom the individual trader signs up makes this possible. You do, however, first have to sign up for a margin account with the broker. The leverage will depend on whether you open a standard account or a mini account.
Working with Leverage in Forex Trading
When you make use of leverage, which is often recommended, you should remember that there is high-risk in your investment. What this means is that you can earn a great deal of profit with leverage, but you also have the risk of losses. The risk factor increases the more leverage you use. This would depend on the direction in which your currency investment moves. In order to prevent great losses you need to have trading rules that would include stop-loss rates and take-profit rates.
You need to know where your stop-loss rate would be. You would be able to stop the trade at the point where you decided the lowest rate should be. This will prevent you from loosing more than you have planned to. The take-profit is the same, but it deals with closing the deal when the set profit has been reached.
Starting Forex Trading with Leverage
Leverage means that you are able to trade with more than your initial investment, which is usually your margin. This margin differs from broker to broker. You are not able to obtain the extra amount, which is usually a loan from your broker, only when you have deposited your margin into your Forex account.
The margin is used to open a position and to sustain it. This is also seen as collateral for receiving the leverage. Once you have received your leverage you are able start Forex trading. This does not mean that you are able to take unwarranted risks. Here you would need to take extra precaution and employ a well thought through risk management plan.
The Leverage Plan
In general, the consensus is that you should not trade with a leverage of more than five per cent. That is that your leverage should be within the limits of 1:100. If you do attempt a leverage of more (for example, 1:400) you are exposing yourself to a higher risk. Even though you have leverage at you disposal you should not attempt too many trades, as you do not want to incur too many losses.