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Thread: Leverage and its Risks

  1. #1
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    Default Leverage and its Risks

    Leverage can be defined as the amount of a trading position you can control with a given amount of margin, i.e. money placed on deposit as collateral. Also, the leverage ratio is the ratio of that amount of leverage to the amount of margin.

    In practice, a leverage ratio of 50:1 would mean that you could control $50,000 worth of a position with just $1,000 on deposit as margin.

    While professional forex traders generally trade using the credit lines that banks and their counterparties extend to each other, retail forex traders have to master this concept of leverage since they are usually required to trade on margin rather than credit.

    Forex Positions Have No Initial Value

    Part of the reason that leverage ratios can be so high in the forex market is that forex trading positions have no net initial value. It therefore is not the same as a purchase or sale of a tangible item such as a commodity or a stock.

    This is because a forex position initially consists of an exchange of assets of equivalent value in the form of different currencies.

    Therefore, when a position is established in the currency market, no money theoretically needs to be exchanged to pay for it because the position has no net initial value.

    This explains why most banks trade on credit lines, but retail forex brokers insist that their less creditworthy customers put up margin to cover potential losses on each forex transaction.

    The Risks of Leverage

    Naturally, this high leverage ratio can act as a two edged sword, since losses can accumulate as quickly as profits on larger positions. Nevertheless, if you have accurately called the direction of the market, you stand to make good money on your rather small initial investment.

    Furthermore, traders need to keep close track of their margin requirements for open forex positions since many retail forex brokers will simply close out losing positions when a situation arises where the margin in the trading account has been used up due to adverse market movements.



    Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

  2. #2
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    leverage explanation would be more interesting check this 4 minutes video, explain of what forex is, and most basic knowledge
    https://www.youtube.com/watch?v=xbs7Khix9rM
    in short leverage are loan from our brokers, to boost our account that way we can derived the account similar to x leverage times bigger.
    for example i use 1:500 at my armada markets account, which mean my account typically 500 times bigger than it actual amount.
    but dont get to excited, leverage also a double edge, it's rise our account potential and also the risk, be wise and never underestimmate leverage.

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    Leverage will help us when we start trading with small amount. But if we can not maximize leverage, use big lot size when trading, the risk will be higher. We should understand what the advantages and disadvantages of leverage then how to maximize it when trading. And for trading, i just use 1:500 in TenkoFx

  4. #4

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    leverage is good but it should be used by experienced traders, although it seems to increase our trading volume but if you loose you have to repent back heavily.

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    Quote Originally Posted by fxapex View Post
    leverage is good but it should be used by experienced traders, although it seems to increase our trading volume but if you loose you have to repent back heavily.
    Leverage must be used as well as possible. We must understand the risk in using high leverage and also low leverage. Regardless how much leverage we use for trading, we must keep be discipline. I try to maximize leverage in TenkoFx, it's only 1:500 but i think it also help trader to not use big lot size when trading

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    One of the key differentiators between hedge funds and other investment vehicles is the use of leverage. Leverage can be your best friend one day, and your worst enemy the next. Everyone knows that leverage will accentuate both gains and losses.my current brokers Tickmill offer 1:500 max leverage, trade from 0.01 lot; i respect them for not offering an extreme leverage such 1000 or even 2000 leverage ratio, which obviously dangerous for any new traders, and none of any expert traders suggested such leverage ratio.

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    As a trader, we must use leverage wisely if we want to get more maximal result in forex. We can try to use demo account first to understand how to maximize leverage for trading in forex. And now every broker give different maximum leverage for their trader, including in TenkoFx.

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    Quote Originally Posted by CahCuncun View Post
    As a trader, we must use leverage wisely if we want to get more maximal result in forex. We can try to use demo account first to understand how to maximize leverage for trading in forex. And now every broker give different maximum leverage for their trader, including in TenkoFx.
    Of course, leverage must be used wisely so we will get the advantages of leverage. Do not forget that forex is risky business. We must know the risk if we use leverage for trading without rule. I only use 1:500 in FreshForex to trade.

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    Quote Originally Posted by CahCuncun View Post
    As a trader, we must use leverage wisely if we want to get more maximal result in forex. We can try to use demo account first to understand how to maximize leverage for trading in forex. And now every broker give different maximum leverage for their trader, including in TenkoFx.
    in determining the it is true leverage to be wise, because leverage can give good or otherwise provide a risk if we can not memange it well. therefore required a high knowledge.

  10. #10

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    leverages seems to be very luring but its should be used with proper care as if you make a wrong trade then you have to pay accordingly.

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