The Forex market is a perfect trading platform for creating serious profits. However, with this potential of making money, it deals with the great danger as well. Many traders are misled by experts who have less information and spread false information. Sometimes Forex brokers who do not have done prior research also misled traders. So, you need to choose one from the Best Forex Brokers.
There are several misconceptions about forex trading are:
- Forex can provide you with immediate profit, which is not true.
- You can jump into the market without preparing yourself mentally and emotionally, without any comprehensive research.
- You need to trade with HIGH LEVERAGE.
LEVERAGE is actually a synonym to DANGERS in Forex trading.
So let’s understand the concept first. Leverage is the use of borrowed capital to invest, presuming such that this profit should be higher than the payable interest.
In straight stock trading, you have to front up all the amount of the stock worth, while in Forex trading, you can use leverage, and with only a small fraction of your own money, you can enter into the trading.
Leverage is a kind of a loan provided by the broker to the client or investor.
For better understanding, let’s take an example, suppose you want to buy a vehicle, but you cannot afford to pay for it all upfront, you go to banks for a loan. The banks then ask for your salary statement to scrutinize whether you are competent in paying the monthly installments or not. The banks, therefore, are willing to allow you to leverage your salary and loan you the money you need to buy your vehicle.
In Forex trading, they offer you very high leverage, which draws a lot of people’s attention as compared to other trading instruments. But lack of understanding about this concept and without any comprehensive research, it might lead you to the danger of losing your money. But if you are well aware of the concept and spend adequate time on research, then it can provide you with a very powerful tool to build profits.
The most commonly used leverage amount is 100:1. In this case, if you want to buy a stock worth 100 dollars, then you have to front up 1 dollar only to enter into trading.
In countries like the US, the government has made strict rules where the buyers can only allow the client the maximum leverage of 50:1. But in several other countries, the brokers offer extreme leverage ranges from 50:1 to 1000:1, which will amplify the potential risk.
Uncertainty is one of the primary characteristics of the Forex market due to its volatility. Leverage actually makes that already high volatility of the Forex market even higher, which can be catastrophic to the investor. When trading with no leverage, the most important thing to remember is that the only possible way to lose your money is if the currency loses its value. The euro or the dollar would, of course, still be worth something, so the trading with no leverage is a pretty secure bet. Therefore some of the expert call leverage a double-edged sword.
In trading, you monitor the currency fluctuation in pips, which is considered as the slightest change in currency price, and it also confides in on the currency pair. These fluctuations in currency prices are just fractions of a cent. Suppose if there is a fluctuation of 100 pips from 1.9400 to 1.9500 when a currency pair like the GBP/USD moves, i.e., just a one-cent movement of the exchange rate.
This is why trading of currency transactions should be carried out in substantial amounts, enabling these slight price fluctuation to be converted into more enormous profits when magnified by leverage use. So when you deal with a large amount like $100,000, these small fluctuations in the currency’s price can result in significant profits or losses.
There’s no reason to be afraid of leverage once you have learned how to manage it. Trading with smaller leverage affords more breathing room. But trading with high leverage can ease depletion of your trading account if the trade goes against you, as you will end up with more significant losses because of the larger trading amount. So in last, you should always keep in mind that leverage is flexible and can be tailored to each trader’s needs.