We all know that using leverage in your trades can be a very good thing if you can do the trade properly. Leverage is made to help traders control larger amounts of fund by just using a small amount of capital. It’s made to give them the chance to earn something big by just using a small amount of money.
However, we also all know Trading Account Types that leverage can be difficult to use if we’re not entirely sure of our trades. If the trade goes wrong, the leverage you use will magnify the losses that you will incur.
How it can go wrong
By understanding the Forex Currencies how leverage can turn your trades into a loss-making nightmare, you can better steer leverage and trades to the right direction.
To illustrate how the use of leverage can go wrong, suppose that the currency underlying one of your trades moves opposite of the direction you were betting your money at, and you have used leverage, the leverage will amplify the potential losses.
To avoid this kind of disaster, many forex traders usually use a strict trading style, which involve the use of stop loss and take profit orders meant to control the amount of losses that a trader could incur.
Picking the Right Leverage Level
If you have already made up your mind, and you have decided that you’ll use leverage, remember that there are other ways to minimize the losses that you may incur. There are three basic rules to do that.
First, you have to maintain low levels of leverage. Then, don’t forget to use trailing stops to minimize the downside and to guard your capital. Lastly, limi the capital to 1 percent to 2 percent of total trading on each position taken.
Aside from those, you should choose the level of leverage that makes you most comfortable. If yoy tend to be conservative and you want to protect your capital, use a low-level leverage such as 5:1 or 10:1, depending on how much risks in this range you want to try. This is also true for those who are still learning a lot of things in currency trading, or those who are just testing the waters.
Stop or Limit Orders
Trailing or limit stops meanwhile, act as an insurance for your trades. They provide you a reliable way to reduce your losses in the event that a trade goes wrong.
When you use limit stops, you can secure the continuity of your trade if everything goes all right, and when the trade turns around you would know how much you would be losing based on the level in which you set the order.
Another benefit of using orders like this is that they remove the emotion in trading. Remember that emotional trading can lead to unimaginable losses. For instance, if you feel too scared of a trade, you might exit it before reaching the best level for profitability, missing out on the better exit points. Conversely, if you get too fired up, you might jump into a trade too soon.