Understanding the use of leverage
Show me the way!
When we think of depositing into and withdrawing from our trading account, the idea is to have the former low and the latter high. But how exactly can we deposit relatively low amounts into our trading accounts with the view to make a generous return on our initial investment?
That is the dream ticket, high returns on low capital investment.
This article will highlight some key broker features to look out for to ensure you make yourself as profitable a trader as can be.
Whether you are new to trading or just getting started, you may want to consider a few features that your prospective broker can offer you to boost your earning potential and grow your portfolio.
Leverage
One core element Forex brokers offer is leverage. Which varies from broker to broker and the account types available.
You may be offered high leverage going into the 1:200 mark but this may come at a premium. You may have to pay ongoing account costs in order to have access to average leverage so it is important to weigh up whether a broker is offering true value. Try and find a broker which will offer high leverage options without a monthly premium.
Leverage is, in essence, a loan within a trading account allowing investors to get involved in markets they would traditionally be priced out of. Historically when going to market, investors would have to come up with the full capital to buy a stock, reserving trading for society's elite.
For instance, a trade worth $100,000 with no leverage would require the investor to stump up the whole amount to obtain the stock/commodity. Thanks to leverage we can dramatically reduce the size of investment yet trade the same volumes.
If we dig deeper into the maths behind leverage we can see that a $100,000 trade using 1:500 leverage would require a $200 investment.
$100,000 (volume) / 500 (leverage 1:500) = $200.00 (capital needed to invest in that trade)
So we can see from the above, that virtually any trader can compete in the market by opening large positions with low capital. A revolutionary feature for online trading platforms.
New STP Broker EagleFX offers maximum leverage of 1:500 on an array of Forex majors, crosses and exotics with no ongoing account costs.
How should leverage be used?
Leverage allows traders to invest low amounts with the potential to turn a large profit. However, leverage should be approached with caution as it can also magnify losses. That being said, the rewards can be BIG!
When approaching leverage, it would be considered advisable for a trader to be honest with themselves in terms of how experienced they are.
Ask yourself:
- How long have I been trading?
- How successful am I at trading?
- Am I a novice or expert?
- Can I afford to magnify losses on an investment?
- Will I monitor open positions closely to protect my investment?
More experienced traders may be better suited to a higher leverage setting as they would be considered better prepared to enter markets. Equally, it would be advised that beginners use a lower leverage setting as to protect their investment and not magnify losses.
Analysis
When entering a particular market, whether experienced or not, traders must be equipped with appropriate knowledge for them to take full advantage of high leverage options.
There are 3 core areas of research and analysis that traders can adopt. It is useful to explore a variety of sources whilst researching as to not get one sole opinion from one media outlet - there may be an agenda attached to it.
Technical analysis is used by traders to study price movements in the markets. This can be done using charts, data and graphs to review historical price movements of a certain asset with a view to spotting future trends. Indicators such as Bollinger bands are useful when conducting this type of research.
Fundamental analysis is used to establish a general overview of how an economy is performing. This includes interest rates, employment levels, and GDP. Traders can develop a general understanding of the strength of a particular currency based on this information and open Forex positions with added confidence. The current stability of a country is useful to know when entering the Forex market.
Sentimental analysis draws on raw data of how many traders have opened a position on a particular currency pair. It allows us to delve into the psychology behind the interest in a market and the emotional state of traders within the Forex market. Sentiment indicators are numerical indicators that show how a particular group feels about a market. There are many available online.
EagleFX has a news feature section on its website which contains a 'Daily Market Analysis' section for you to review the latest market movements. This feature coupled with the 'Economic Calendar' will help you stay informed and ahead of the curve!
Demo accounts
A feature of a responsible broker will be to provide a space where potential depositors can practice using the functions and features of that platform.
Using MT4 as a beginner can be a daunting prospect. Although tried, tested and revered by millions of traders around the globe, the award-winning platform should be tested before going live. So, you as a trader can get the most out of it.
It is of particular significance to develop a trading strategy to suit you and your account budget, especially when using high leverage. A demo account with like for like conditions as a real account will allow you to chop and change leverage and find a suitable setting for YOU.
Spread
The tighter the spread the better as this represents the cost of a transaction on a platform.
A platform that offers tight spreads is an ideal environment for scalpers looking to enter the market and leave quickly with a profit. Scalpers need a tight spread as they will place the most trades out of all trading strategies thus paying more commission.
Customer support
Always ensure a broker you choose offers a high standard of customer care. Beginners using lower leverage settings as well as experts using high leverage will all need some degree of support in unforeseen circumstances.
To sum up
Whether new to trading or a seasoned pro, it is important to gauge our leverage setting to suit you.
Set yourself goals whilst trading and try not to let emotions take over. Set a target profit and stick to this. Do not let greed creep into trading decisions as this deadly sin can be lethal to your account balance.
Use a demo account and practice trading with leverage if this is a new concept to you. If you feel like you're not trading successfully and not seeing the ROI you dream of, then there is no shame in going back to the drawing board and developing a new strategy.
Develop your perfect strategy in pristine trading conditions today at https://www.eaglefx.com/
Join for free today and starting trading with as little as $10.00.
This article was submitted by EagleFX.
