Is high leverage recommended?

This is the most common question in the mind of every novice investor in the forex market. Leverage has more significance in the forex market than any other stock market because you cannot get as much higher leverage with stocks as you can get in forex market. Basically leverage refers to the amount of money borrowed to invest it in some other thing. Usually people use leverage to invest it in forex or stock market. In forex, leverage is the loan given to the investor by the broker who is handling his account.

Now let us try to find answer to the question of preferring high leverage or low leverage. In forex, you can get leverage as high as 400:1. It means if you want to trade with 400$, the margin required would be only 1$. Leverage is used to extract the profit from the fluctuating currency rates of different countries. The reason behind providing such a high leverage in forex is that the fluctuation in the currency rates is not more than 1% intraday. That is why high leverage is not given in equities and stocks.

Now high leverage can act as both: a boon or a blunder. If the high leverage is used by small investor, a slight negative fluctuation can cause a potential loss. On the other hand, a slight fluctuation on the positive side can help you earn a significant profit overnight. Now we can compare that we cannot take chance to suffer from potential loss in order to become rich in a wink. High leverage is not small investor’s cup of tea.

On the other hand, we cannot say that an experienced investor should always go for high leverage. With high leverage, the stop loss limit is very less hence; there are more chances of loss of very high magnitude. Leverage can be considered as a source of high profit in a short span of time. So in short, we can say high leverage is a weapon of gambler not of an investor. Even the investment banks use leverage as low as 40:1 in some of their trading. By using even 20:1 leverage, 25 pip decline can cause approximately 5% loss. Now you can well imagine that how high leverages can turn your investment into a dead loss.

There is one more question that why brokers offer leverage to such a large extent? The answer to this question is very simple. Trading with high leverage makes you trade with more money, which turns a small client into a big client, or a small investor into a big investor. The brokers profit from the spread, and if you trade at high leverage they will get higher profits.

So we can conclude that high leverage should not be used too often. Following a good money management system will not allow you to trade on high leverage. However, there are situations when a higher risk is needed to profit from a rare opportunity, and in such circumstances, high leverage can be your best ally.