Impact Of Financial Leverage On Profitability

One of the common misconceptions encountered in the thinking of traders is the need for high leverage to maximize the profit potential of the forex market. Before we discuss it, let us first look at the basic concept of Leverage and Margin in Forex.

Some definitions of Leverage:

"A mechanical force or advantage gained by using a lever"
 "The limits on which investors or companies are allowed to take advantage of borrowed money"
    "The use of borrowed money to increase speculative capabilities and increase the profitability ratio of an investment, for example by buying a securities product using the"

In other words, leverage means the ability to use whatever you have to increase the borrowing limit of the other party. While the capital / funds that you use is referred to as margin.

A real example in life is when you want to buy a home but can not pay it in cash and directly; Then the bank will check your financial ability by looking at the salary you earn each month. If the bank judges you financially, the bank will leverage your current salary and pay off the house you want to buy; Then charge the credit / installments for your next pay off.

While further explanation of how Leverage works in Forex you can see in the following article: this is how leverage is used in forex trading.

High Leverage?

It is true that high leverage attracts many new investors to the forex world, but if those people are thinking deeper about the concepts of leverage, they will hesitate when having to trade with leverage 100: 1, 200: 1, or even 400: 1. Leverage is actually one of the dark cliffs in forex.

If forex is like driving a car; You will understand when you drive at 60 KM / h you will be easier to make corrections to your driving mistakes (such as: too close to road markings, too close to the sidewalk, passing sleeping cops, passing holes in roads, avoiding other riders) With when you board a car drove 200 KM / h.

In the world of Forex, leverage can be equated with high speed (in the above parable). The higher the leverage you use, the harder it is to correct for the slightest change in the market in the opposite direction with your position. However, if you use lower leverage, you will generate a low profit, but no single trade can jeopardize your trading margin and account, and you have a chance to correct your mistake by opening another position.

Volatility in the Forex Market

One of the hallmarks of the forex market is its volatility (instability). Leverage, just make the high volatility becomes higher, and increase your risk. The important thing to remember about trading without leverage is the only way you lose all your capital / margin is if the currency you trade loses its value. Of course, 1 Dollar / 1 Euro / 1 Rupiah will always have value, so trading without using leverage is a much safer trading.

In addition to playing a very negative role to your capital, leverage also eliminates your focus and obfuscates price developments in the market and causes you to be obsessed over the movement of capital in your account. Surely you understand what will happen if you do not pay attention to market developments in opening positions.

It can be concluded that the use of high leverage in forex has become a prolonged trend in the world of forex trading. The trend is not a good thing for forex traders; But high leverage is constantly marketed and crammed into new traders by the marketing team of forex brokers. The reason that traders can achieve a high profit / profit. But they do not explain that with high leverage you can lose all capital in your trading account if you make a fatal mistake, and you have no chance to fix it.


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