Leverage is quite possibly the most exciting and risky instrument in trading. If you are new to this world, it’s likely that you think it’s a buzzword. When you realize what it truly does, though, it can assist you with growing your account faster or withdrawing it at speed.
Let us break it down easily and simply.
What Is Leverage in Trading?
Leverage lets you control a large position in the market with less of your own money. It’s as if borrowing money to make your trade larger.
For example, suppose you have $100 and your broker offers you 1:100 leverage. You can control a $10,000 trade. You feel powerful, right? But the fact is, the more leverage, the riskier.
Why Leverage Attracts New Traders?
Most new traders are drawn to leverage because it brings enormous rewards with minimal capital. You don’t have to have thousands of dollars to start. With hundreds, you can trade positions you otherwise cannot afford.
But then that is also the reason your small market movements can have a big impact on your account. A 1% drop against your trade with high leverage can destroy your whole balance. So although it is tempting, you must use it responsibly.
The Role of Margin in Leverage
When you trade with leverage, you must have some money in your account; this is called the margin. Your margin is your buffer. The higher leverage you use, the smaller the margin you will need to use, but the higher the risk.
If the trade is against you, your broker will request a margin. You put in more money, or the broker will close the position for you. That is why risk control is very important with leverage.
How to Use Leverage Wisely?
Here are a few easy-to-follow guidelines to ensure you stay safe:
- Start Small: Use lower leverage if you are just starting out. 1:10 or 1:20 is a good place to begin.
- Place Stop-Loss Orders: Always hedge your trades with stop-loss orders to reduce potential losses.
- Don’t Risk Everything: Never risk all capital in one trade. Diversify your risk.
- Know the Trade: Know why you are entering each trade. Do not make a wild shot.
Choose a Broker or Prop Firm Wisely
If you’re employed in a forex prop firm, they will offer funded accounts and specific leverage levels. Some of them even train you on how to use leverage properly.
For Filipino traders, the best prop firm in the Philippines is one that combines coaching, risk management, and capital access. These companies help you trade in a disciplined way, not an emotional way. They will likely implement rules to keep you from overleveraging, which is a very good thing.
Common Mistakes You Must Avoid
Steer clear of falling into these traps:
- Overlooking Risk: Leverage without risk management is a recipe for disaster.
- Overconfidence: Because one trade works once, it does not mean it will always work.
- Chasing Losses: Do not increase your leverage in order to try to make back what you’ve lost. It most likely only ends up doing more damage.
- Skipping the Demo: Always practice first with demo accounts if you are new to learning about leverage.
Wrapping Up
Finally, leverage is not a promise of success. It magnifies profits as well as losses. Strategy, discipline, and control over emotions are the real keys to growth. Leverage can be a blessing when applied wisely, enabling you to grow faster. But overuse it, and it will sweep your account clean at the same rate.