Nowadays, brokers provide us with many degrees of leverage. The higher the leverage, the smaller the funds we will need to start trading.

When talking about forex trading, one of the first things mentioned is leverage. Leverage in forex is the highest of its kind in financial market. Nowadays, brokers provide us with many degrees of leverage. It could be 1:50, 1:100, 1:200, even as high as 1:1000.

high leverage

Leverage enable us to trade forex, even though we don't have much funds. The higher the leverage, the smaller the funds we will need to start trading. It is one privilege that makes people want to try and get involved with forex trading. However, trading with high leverage does not automatically guarantee success, and does not mean that trading risk become smaller too.

 

Trading With Low Capital

The biggest advantage of leverage is that its presence means we don't have to provide a large amount of funds to start trading in forex market. Ages ago, only the wealthy are able to make profits through forex trading, but now, thanks to leverage, everyone can do it. The way leverage works, if we trade in 1:1000 leverage, then for contract sized at USD 10,000, we will have to pay USD 10 only (counted from USD 10,000/1000) for each transaction in mini lot. The higher the leverage, the less capital we will need to start trading forex.

Moreover, although the funds we receive via leverage is practically borrowed from brokers, it is interest-free. If you want to trade in property, you have to ask for home loans from banks and pay annual interest. But if you want to trade forex, you will get the loans, but doesn't have to pay the interest. 

 

Bigger Profits, Bigger Losses

It is obvious that the large funds provided by leverage allows us to open several positions in small quantities. Although your success in attaining profits doesn't exist in how many transactions you make, but more transactions means you could gain more profits through various stratagems, like pyramiding, or opening positions in different currency pairs.

However, leverage disguise the real amount of funds in our account and any changes on it. Big profits could turn out smaller, and small losses could turn out bigger. Those who trade with high leverage have to be extra careful when prices moves against their prediction and never forget to put in stop loss.

 

Psychological Influence of Leverage

It must also be noted that leverage influences us psychologically. Trading on high leverage could be compared to borrowing money from banks. By using leverage, we 'borrow' money from brokers interest-free. 1:1 Leverage means you don't borrow any money. If you have USD 10,000 and you purchase 10,000, it just means that you use all of your money. But if you use leverage, you use more than what you have. Of course, having more money gives us more bravery to make risky decision, but also makes us more vulnerable to the dangers. What seems like small lose could turn out bigger and unaffordable. That is not good. Just like borrowing money from banks must be done carefully, so is borrowing money from brokers.

Leverage have helped successful traders to succeed, but it is also due to their ability to free themselves from emotion when trading. They are able to distance themselves from panic, fear, and greed, as well as psychological influence of leverage during trading hours. For beginners, it would be better to start with one of the smaller leverage, 1:50 or 1:100. Later, when you've attained more experience and emotional tenacity, feel free to try higher leverages.