One of the primary advantages of trading forex with EagleFX is the availability to take advantage of high leverage. When used correctly, leverage can assist you in generating much bigger returns than you would when trading strictly with your own funds. Of course, leverage needs to be fully understood and used in the proper manner to ensure the best results. Here, we'll explain what leverage is and how to use it to your maximum advantage.
In the traditional markets, whenever someone purchases a stock, the transaction is simple and straightforward. The purchaser pays a fixed amount to their broker in exchange for a fixed number of shares. Each share will have value, as determined by the stock market, and this value can increase or decrease over time. What's important to note here is that the purchaser pays for all of the shares upfront and can purchase nothing above and beyond what he or she can afford at that time.
When trading Forex, assets are typically traded on margin, which means that trading can commence without all of the involved funds being paid in advance. Instead, EagleFX will ask you to commit a percentage of the total amount to enter into the transaction. This amount will be held on margin and means that you're trading with leverage. To put it simply, when you trade with high leverage, you are able to enter into much larger position sizes than you otherwise would have been able to secure.
Let’s assume that you want to trade on the EUR/USD pair. In this instance, what you will be doing essentially is selling off USD, and then using the funds received to purchase euros. When entering into this type of contract, the current exchange rate will decide exactly how many euros you will be able to purchase for the dollars that you sold. The variable in each transaction is going to be the exchange rate. As it changes, the value of your contract changes and a profit or loss will be determined by the rate that the time you sell, or exit the position.
In contrast to the stock shares purchase example above, FX trades involving leverage could present a risk to the broker if not for margin. When trading with leverage, you will not be required to put all of your own money up front. This means that you could just exit if the exchange rate moved against you and you were going to experience a loss. To protect against this, EagleFX and other forex brokers require something known as margin. This is an amount of funds which are held in your account to cover the cost of your trading positions. Used margin is secured by the broker until such time that the trading position is officially closed.
The ability to generate a large profit while putting up only a small amount would certainly be considered a good one to have. With only the smallest movement in the exchange rate in your favor, you could double or triple your initial investment. With a leverage ratio of 1:100, you could have a 100% return. Now, imagine if you were using the maximum leverage allowed by EagleFX, which is 1:500? It's pretty easy to see the profit possibilities.
What happens if the market moves against you? Leverage not only has the power to increase your gains, but can increase your losses as well. Because of this, you will want to take the time to learn how to trade well prior to using larger amounts of leverage. Even when you have reached the experienced trader level, you'll still want to use leverage wisely. There is no denying that leverage can be your best friend, but that friendship can and will turn sour if you abuse it.
By now, you realize that leverage has the power to help you reach your profit goals much faster. You should also realize that while the use of leverage does increase financial risk, it can be a powerful and wonderful tool when used appropriately. The higher the leverage ratio on a profiting trade, the larger the earnings. As a general rule, think of leveraged gains in this simple manner:
10 x higher at 1:100
20 x higher at 1:200
30 x higher at 1:300
40 x higher at 1:400
50 x higher at 1:500
Obviously, this is extremely exciting for individuals who don’t mind the extra risk. Then again, risk is one of the many things that attract people to FX trading to begin with.
Always remember that the higher the leverage, the higher the confidence needs to be in your trading strategy. When leverage applies, losing trades can certainly take a bite out of your capital. However, you can limit the risks associated with high leverage by using strict stop losses. The failure to use stop losses is a common mistake that is typically made by new traders and the majority of these individuals find their account funds are depleted faster than they imagined.
Do note that a stop loss only acts as an instruction to your broker. Whether you're trading with EagleFX only, or using several brokers, there’s never any guarantee that your position will close exactly at the desired level. What it will do though is place a limit on your losses. Setting a stop loss is one of the "golden rules" of forex trading. It is simply that important. The EagleFX trading platform is extremely user-friendly, making it easy to set stop losses with each and every trade.
The bottom line is that trading with high leverage can bring large financial gains. Just be certain that you are selecting the leverage level that corresponds with your confidence in each trade. EagleFX extends high leverage to their clients, while keeping minimal margin rules in place. This is the best possible scenario for those who understand how to use high leveraged trading to their maximum advantage.