Forex: Advantages and Disadvantages of High Leverage Trading – A Must for Beginner Traders
With access to higher maximum leverage ratios, UK traders will be able to open larger positions in the Forex market, increasing their profit potential.
In the worst case, using a high maximum leverage ratio can wipe out an entire trading account. Traders are strongly encouraged to learn all they can about leveraged and margin trading, in addition to following established risk management procedures.
Benefits of High Leverage Trading
High leverage in trading allows you to maximize profits while minimizing effort. Regardless of the instrument being sold or the amount being risked, the primary purpose of leverage is to maximize profits from each potential trade by increasing stakes.
Even though you can invest more money in each position and achieve the same result, using leverage ensures that your money is artificially multiplied, often by hundreds of times the original amount.
Improved capital management
You can make more money with each trade, so you make better use of your money. For the sake of discussion, let’s say your money is an investment that earns interest. Due to the dramatic effect of leverage on capital efficiency, it is possible to expect not only higher potential profits in the short term, but also a significantly higher return on investment in a much shorter period of time.
Reduce the downsides of low volatility
For traders, it is crucial to keep in mind that high leverage can mask periods of low volatility. Markets have longer cycles than more stable instruments, so the most lucrative trades tend to be the riskiest.
The inherent conservatism of forex traders and the scarcity of external indications that can reliably predict changes in exchange rates help keep volatility low in the foreign exchange (Forex) markets.
When volatility is low, it can be difficult to make a profit, but high leverage can help by making more money with fewer trades.
Using high leverage can be risky because it allows you to lose more money. If you keep both your gains and losses, the costs of using leverage on losing trades can far exceed the initial investment.
The Margin Call Problem
Your ability to meet your broker’s margin requirements is never guaranteed. If you drop below this threshold, your broker will issue a margin call, forcing you to sell some or all of your holdings to cover your financial commitments.
By closing positions too soon, you risk losing potential profits as well as any potential liquidation gains.
It’s crucial to keep this ongoing threat of leverage in mind while considering how best to manage your finances.
Another protection against losing money when using leverage is to enable negative balance protection on a retail trading account.