Adding Leverage to Your Foreign Exchange Trading

Adding Leverage to Your Foreign Exchange Trading

One of the attractions of the foreign exchange trading is the large amounts of leverage on offer.  Using leverage when you trade increases the profits you can make, but it also increases the amount you stand to lose.  When you start trading forex you need to consider the leverage on offer, whether you should use the leverage, how much leverage you should use per trade and the effect it could have.

The Leverage On Offer

When you choose a forex broker you will find that they all offer different amounts of leverage.  When the forex market was wholly unregulated it was common to find brokers offering leverage of 400:1.  However, certain countries have placed regulations on the brokers based in their country.  One of these regulations relates to the amount of leverage they are allowed to offer.  Any broker based in America is only allowed to offer 50:1 leverage as the maximum.  However, if the broker is based in Australia or the UK then they can offer any leverage they want.

Should You Be Using Leverage?

The question that everyone faces when looking at foreign exchange trading is whether or not you should use leverage.  Some traders do not use any leverage and this ensures that they are not increasing their trading risks.  Of course, most traders will use some form of leverage even if it is a very small amount.  The use of even small amounts of leverage allows the trader to make a larger profit.  To determine whether or not you should be using leverage you need to consider a number of factors.

You have to consider what your trading strategy calls for.  There are certain strategies that require leverage or large amounts of capital.  Leverage is commonly used by short-term traders because the profits they make would be too small otherwise.

You also need to think about your risk tolerance.  When you use leverage you are increasing the amount of risk you face with each trade.  You should never increase the risk beyond your risk tolerance because you have set this level where it is for a reason.  You also have to consider whether the use of leverage will increase the amount you place on the trade past the 2% mark.

Foreign Exchange Trading Leverage Per Trade

If you are going to use leverage you need to consider how much you use on a trade to trade basis.  It is not recommended that you have an overall leverage amount that you use with every trade.  There are times when a set amount of leverage will put you over the 2% risk.  However, this same amount may be under the 2% mark at other times.

When you look at your broker you have to consider whether you are able to change the amount of leverage you use per trade.  There are some brokers that only allow you to trade with the maximum leverage on ever trade.  While these brokers are not very common they are out there so you need to be aware.  Whenever you use leverage you should vary it to fit the trade you are placing and not the trades you have done in the past.

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