Leverage: Advantages And Disadvantages In Forex

Leverage is both one of the biggest advantages and disadvantages in Forex. Depending on the broker you’re using, leverage can be up to 200:1 or even 400:1. A 400:1 leverage means that you can trade up to 400 times the money you have on your account. So, for each $1000 you have on your account, you can trade up to $400.000.

Advantages:

Considering you can trade up to 200 times or even 400 times your money, one of the advantages is that you can make huge profits even if you don’t have much money on your account. Considering for example the maximum 400:1 leverage, with just 0.25% of movement in your direction, you can double your account.
So, when you’re right about a trade, leverage really pays off. No other market in the world offers so much leverage, and that’s why Forex has been attracting many traders.

Disadvantages:

Since you can make so much money using leverage, you can also lose your entire account on a single bad trade. If you can double your account with 0.25% movement, you can also lose your entire account with just a 0.25% movement against you. This is something most traders forget when they use too much leverage.

No matter how good you are as a trader, or how good your system is, once in awhile you’ll have losses. You’ll also have some losing strikes which mean you’ll lose in 3 or more times in a row. If you’re using too much leverage and face a losing trade or a losing strike, you’ll be out of the market.
If you’re correct about a trade and use big leverage, you’ll be able to make huge percentage returns on the short term.