Since the advent of the internet, the number of people asking what is forex has risen consistently. However, the majority of people who do find out about forex and start trading end up losing their starting capitals to the vagaries of the market fairly quickly.
This happens solely because these individuals jump into the market without learning everything there is to learn about forex in addition to answering the simple question of what is forex. For instance, if you merely just focus on the basic aspects of the foreign exchange then you will never be able to learn what leverage or margin is.
These instruments of forex are the key to success in forex trading and should be treated as extremely important concepts to be learnt while studying the foreign exchange market. Doing this would make you aware of some vital rules of using leverage or margin. Here are the three most important ones.
Try to Balance Rewards and Risks
It is very common for beginners to start dreaming about big returns through positions even before they have even learnt what forex is. This happens mainly because of marketing campaigns that are run in the industry focusing on various benefits of trading forex and success stories such as George Soros.
Unfortunately, even though these stories and claims are true, they do not happen to every trader. If you have learned about what is forex leverage and margin and want to incorporate them into your strategy then you need to be cognisant of the fact that every position has equal amounts of profit potential and loss potential.
Effectively, while using leverage would increase the size of your possible profits, it would also increase the size of your possible losses. Therefore, while using leverage and margin, you need to ensure that you have one eye on risks inherent in a trade and the other on potential profits.
Use Leverage Moderately
The best thing to do would be for you to moderate how much leverage you use. While you learn what is forex leverage and margin, you will also come across claims that you can use leverage ratios of 500 to 1.
This is actually not true. You should never look to use leverage above the 100 to 1 mark because in this way you would increase the profit potential of your positions while still keeping the risk potential manageable.
Decrease Leverage Usage If You Increase Risks
The extent of risk you take with a position would not only be related to how much leverage you use but also the actual trade. What this means is that every trade has its inherent risks. The potential success of a position can be seen by finding out the risk to reward ratio.
What is forex trading is basically minimising risks. Therefore, if you are going to take more risks so as to gain more profits by choosing the riskier positions then you should balance this situation by reducing your leverage usage. Resultantly, you would increase your profit potential while keeping the possible chance of a loss the same.
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