Leveraging is a trading facility that is provided by trading brokers to help equity and currency traders maximize their financial return. Unfortunately, it also maximizes losses. With many brokers offering leverage facilities in excess of 200:1, it is an important dynamic the currency trader has to consider carefully when developing a currency trading strategy.
A trader can use leveraging to his advantage but if the trader uses too much the market might use it as a weapon against his account. It is important to remember that the leverage a trader uses represents a loan from the forex broker. To protect this loan the broker retains the right to close all your trades if the market goes against the trader by too large a margin, this is called a margin call. The point at which the forex broker executes a margin call depends on two things:
1. The amount of leverage used.
2. The number of pips the market has gone against a trade position.
Leveraging Away Your Trading Advantage
Generally speaking using a leverage of 3:1 will allow you to sustain a 60pip loss without give away more than 2% of your account balance on a single trade; many successful currency traders would advise that you limit your losses to 2% or less. If instead, you use a high leverage of 100:1, then with a mere $100 you can enter a traded for more than 10,000 units. While this will give you a return of approximately10% for every 30pip move, it will take away just as much if you are wrong. It is better to make smaller gains consistently than to risk losing big on one trade.
Leveraging Without the Risk
You can get around the over leveraging problem by stacking your trades to get more from a particular move in the market. If you enter a trade and it goes positive but has not yet reached the profit target, you can enter another trade, if the opportunity presents itself. But only do this after you have put in a stop loss to protect the first trade. This stacking method ensures you are never overexposed but makes full use of the leverage facility offered by the broker. If this method is followed religiously you should have little trouble exiting bad trades and you will do so with small losses while ensuring that profits from good trades are maximized.
It should be your decided effort to improve your currency trading win/loss ratio. Regardless, even if more than 60% of your trades are bad you should be profitable if you let the good trades run, cut the bad ones early and stack trades where the opportunity presents itself. Even if you suffer a loosing streak, not abusing your leverage facility will ensure you will live to trade another day.