EFFECTIVE USE OF LEVERAGE RATIOS

Every trader should be thoroughly educated about the trading margin and the effective use of leverage ratios in relation to their trading activities if they would gain grounds and most times earn a win in the forex market. The idea of a leverage ratio is very much like that of margin which is defined as a kind of debt that is used by traders and investors to control trades.

Leverage is the use of borrowed financial capital to increase the potential return and risk from holding a trading position or investment. It is very common in forex operations these days because most retail forex traders now use margin accounts as the primary venue for currency trading activities.

In the retail forex market, the availability of leverage benefits a trader as they get to control a larger position than they would have based on an unleveraged account. This way, they would make great profit if the market view turns out correct. In other words, leverage ratios increase the profit potential of traders.

There are three types of leverage majorly used by forex traders in the market.

Effective leverage: This is the amount of leverage a leverage account that trades are using to control the obtained outstanding amount of current network position the trader has been able to establish in their account. It is numerically expressed as you would a reduced ratio of the obtained outstanding network position to the obtained margin on deposit.

Available leverage: This is defined as the amount of leverage available to the currency trader to use with the existing trading positions and the mediator's highest amount of leverage that is allowed for the particular account.

Maximum leverage: It is the whole amount of leverage that is made available to a trader by their mediator.

A trader needs to know that the total amount of leverage a broker would provide per time is not constant. They have high rates that are mostly expressed in ratio. These rates can peak as high as 1:100 or even more. What 1:100 means is that with the equity of $1, you can open up positions up to $100.

There are a lot of advantages effective use of leverage ratios come with. They include;

High profit: The use of leverage in forex trading would give trades the opportunity for an increase in their initial investment. This increase would make them play big.

Improved capital efficiency: Having more currency to manage equals the opportunity to open more trades in various instruments for trading. Simply put, you can diversify your trading portfolio and heighten your profit-making chances.

Ease and Convenience: You have a broker who is like a personal manager that could help you understand the risk involved, and balance your strategy for trading.

Leverage is a rather progressive tool that would help a trader achieve good results in the forex market. The advantage of making a lot of money with a limited amount of capital is one that stands out above all. The best leverage ratio that favors both beginners and experienced traders are 1:100, a trader should only always put to heart the risk high leverage contains.