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Monday, 18 July 2016

Leveraging for profit

What is Leverage?

Leveraging is putting down collaterals to hold a place that is larger in value. This collateral is known as margin. To simply put, leverage gives traders the ability to purchase quantities of currency without having the equivalent in money. Leveraging allow traders to have a larger exposure on the market for a small amount of money. This type of trading is used to yield higher returns on a small initial deposit that could not have been possible if the currency was bought physically. While it yields higher returns, it could also result in higher losses. This dual nature of leveraging is mostly due to the fact that the higher the leverage on the deposit amount the greater the risk. Leveraging is also called the two-edged sword so it should always be used with caution.
Leveraging is done in ratios known as leverage ratio. Some of these typical ratios are 50:1, 100:1, 200:1, 400:1 and 500:1. What this means is that for dollars invested in the account, the broker should enter trades that allows for a profit of 50 or 100 times the money for 50:1 or 100:1 leverage. The ratios are equivalent to margins and are expressed in percentage. The margin comes from dividing the ratios and multiplying it by 100 (ex. 1/50*100=2%). These margins are generally set by the broker and establishes the base line amount necessary in the account before trading is initiated.  It is important to note that if the leveraging ratio changes so does the margin present on the account.

How to leverage

Though leveraging appears very simple from the outside it is actually very complex mostly on the broker side. For the broker who has the task of setting leverage ratios, it involves the broker looking at all the assets and the capital they accumulatively generate in order for the company to meet its financial obligations. This is then wagered against the potential earnings that can be produce by each account. These accounts made by the broker assist investors in determining the kind of leverage that they want on their money.

The accounts generally starts from a mini account that is low risk/low leverage and as such comes with a minimal profit per pip, it extends to accounts such as super max where the risk is high and the potential profit is even greater. However brokers always ensure that the account maintains the margin required for trading.

On the investor side it is less complicated as all that is required is for the investor to do is choose from the broker’s pre-existing account types base on the leverage that is wanted on their money and the risk they want to take on. However it gets a bit complicated as different accounts will have a variety of investment options and investors have to choose the one that best suits their needs.

What to leverage?

There are a number of things that can be leveraged by a trader to make their account more profitable. Each trade should choose their method of leverage carefully base on their risk appetite. A number of different leverage methods can be combined so as to spread or reduce the risk.

  Broker leverage

As discussed previously a trader uses broker leverage by selecting a specific account. Each broker has different types of accounts that provides different leverage and margins. By selecting a specific account you can open your account with the minimum ain't specific by the broker. It is always recommended to have a risk management plan and also to recognize that when leverage changes, risk changes.


Traders can also leverage trading signals. A huge amount of signal sources exist and it is up to you as the trader to use one that is in line with your trading plan.
Trading signals can be subscribed to from within metatrader, from their signals website or from another ingredient source such as bkforex.

  Mentor/Other Traders

Traders can also leverage other traders to enhance there trading game. Having mentor means having someone with more experience than you do to assist you in becoming more profitable. A mentor will be able to spot more opportunities than you or be able to recommend more high probability trades. A mentor doesn't necessarily have to be someone you speak with everyday, it could be that you subscribe to a service such as that provided by csquared trading or follow someone from their YouTube postings.
You can also leverage the ability of other traders through social trading or becoming part of an association. An amazing social trading platform that allows you to copy other traders is etoro. With this platform you can benefit from the profitability of other traders without even placing a single trade.

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