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kajal goyal 19-Apr-2022

Leverage in Forex Trading

Leverage is the ability to use something small to control something big. Specific to foreign exchange (forex or FX) trading, this means you have a small amount of capital in your account and can control a larger amount in the market.

Stock traders call this "margin trading." When trading forex, there is no interest on the margin used and it does not matter what type of trader you are or what type of credit you have. If you have an account and the broker offers you margin, you can trade it.

The obvious advantage of leverage is that you can make a lot of money with limited capital. The problem is that you can also lose a significant amount of money by trading with leverage. It all depends on how smart you use it and how carefully you manage risk.


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In which markets can you use leverage?

Some of the markets you can trade with leverage are:

 

Indices

An index is a numerical representation of the performance of a group of assets from a specific stock exchange, region, region or sector. As indices are not physical assets, they can only be traded through products that reflect their price movements, including CFDs and ETFs.

Forex

Foreign exchange or forex is the buying and selling of currencies with the aim of making a profit. It is the most traded financial market in the world. The relatively small moves in forex trading mean that many choose to trade on leverage.

Cryptocurrencies

Cryptocurrencies are virtual currencies that can be traded like forex, but are independent of banks and governments. Leveraged products allow traders to access major cryptocurrencies like Bitcoin and Ethereum without tying up a large amount of capital.

 

 

Risks of Leverage in Forex Trading

Although leveraged trading can be considered a way to increase your forex profits, it also increases your risk. For this reason, an effective risk management strategy is essential to using leverage in forex trading. High leverage forex brokers generally offer important risk management tools, including the list below, that can help traders manage their risk more effectively.

 

Stop Loss Orders

A stop-loss order is intended to limit your losses in an unfavorable market by excluding you from a trade that moves against you at a price set by the trader. They basically indicate how much you are willing to risk to trade. But even if there is a stop loss, the closing price cannot be guaranteed due to slippage.

 

Take profit order

A take profit order works the same way as a limit order in that it will always be executed at the target price you set. If the market opens for a product at a price lower than your target price, your order will be filled at the best level, passing through positive deviations.

 

What does margin call mean in forex trading?

All deposits used to hold open positions are retained by the broker and are referred to as "used margin". All funds available to open additional positions are called "available capital" and, when expressed as a percentage, "margin level".

A margin call occurs when your margin level has fallen below a predetermined level where you risk having your positions liquidated. Margin calls should be avoided as they lock in trader losses, therefore the margin level should be constantly monitored. Traders can also reduce the likelihood of margin calls by implementing risk management techniques.

 

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