Almost every trader in this world is familiar with the forex market due to its facilities and advantages. For instance, you can refer to the leverage in the forex market. However, if you excessively implement leverage, you will mostly face a huge loss.

Nonetheless, leverage in forex trading commonly refers to your capacity to control a high position with a small capital. Although the concept of leverage might seem attractive to most traders, there are several downsides.

In this article, we will highlight how excessive leverage can lead to major losses in forex and how you can prevent it from happening.

Leverage Comprehension in Forex

Leverage in forex trading commonly allows you to initiate a larger position while investing a small portion of your capital. For instance, if there is a leverage of 500:1, it indicates that you can open a position worth 500,000 dollars with just 1000 dollars.

The concept of leverage is also noticeable in CFD trading when you are dealing with assets like stocks or commodities. Nonetheless, in the forex market, your leverage can be as high as 500:1 or as low as 10:1 which primarily relies on your forex broker.

For example, you can calculate leverage using the following formula: Leverage Overall Position Volume / Equity.

If you have 2000 dollars and you open a position of 200000 dollars, then your leverage would be 200:2

The Downside of Excessive Leverage in Forex

Many forex traders who operate on relevant platforms like the MetaTrader 4 normally view leverage as a profitable opportunity. However, there are many downsides of leverage in the forex market you should be aware of, such as:

Exaggeration of Losses in Forex

Following our earlier reference, leverage can give many profits but it can also excessively increase your losses. For example, if you implement 500:1 leverage and the trading platform moves just 1 percent against you, there is a possibility that you might lose all your capital.

For instance, if you do not have a proper stop-loss order or a proper risk-management strategy, leverage can consume all of your assets.

Thin Margin of Inaccuracy

As leverage can lower the margin for inaccuracy, if there is high leverage in forex trading, minimal market movements can cause enforced liquidations or margin calls. However, in the forex market, trading can be extremely volatile because of many factors.

For example, these factors include intergovernmental occurrences, and economic data announcements, alongside the central bank activities. 

Mental Pressure in Forex

Forex psychology is one of the crucial aspects following the leverage. Moreover, when you are trading, high leverage can emotionally impact your decision-making. As you know, a tiny fluctuation can lead to losing most of your assets, the whole idea creates a high mental pressure on you.

Emotional decision-making can be responsible for irrational activities. For instance, some of them are revenge trading, excessive trading, or neglecting the risk-management procedure.

Profile Liquidation And Margin Calls

If your losses exceed the necessary margin to maintain a position open, then forex brokers might use margin calls to address the issue. Furthermore, if there are no deposited funds, the forex broker will hurriedly shut the position to hold off any additional losses.

Mother, several traders have a misconception that their losses normally rely on their account funds. However, if the market is highly volatile, you might face a negative balance in your account.

Presumption And Unplanned

Normally, traders think that leverage is a source of high profits and hardly poses any threat to their assets. Nonetheless, this overconfidence can cost you your entire asset, as larger positions can often drive you to reckless trading.

Furthermore, several traders face huge losses because they skipped learning the fundamentals and other risk-management factors.

How to Properly Regulate Leverage Risk?

As we have described several downsides of excessive leverage, there are also many ways to prevent it from happening. For example, here are some steps you can follow:

Implementing Lower Leverage

Several successful and proficient forex traders use lower leverage ratios like 5:1 or 10:1 for trading. The lower leverage can provide you more ease than the higher ones, as it has a smaller risk margin call.

However, many regulators currently put restrictions on leverage, for instance, the European Security and Markets Authority restricts their leverage at the 30:1 ratio.

Using Risk-Management Tactics

As a forex trader or implementing leverage, you have to apply proper risk-management strategies. For example, you have to implement stop-loss orders, and take-profit sequences alongside investing only a small portion of your capital for each trade.

The following procedure will help protect your capital from being wiped out by a single trade.

Comprehending The Market

It is very important for you to grasp the fundamental knowledge, for instance, you have to understand the forex market properly. Moreover, you can learn the basics and technical analysis alongside understanding several macroeconomic factors that impact the currency values.

Trading with A Strategy

As a trader, you should always have a plan for how you will conduct your trading. For example, you can set exit and entry points, adjusting your position alongside the maximum losses you can take before initiating a trade.

In Conclusion

Leverage undoubtedly has several benefits, but from many traders’ perspectives, it is a double-edged knife. As it can give a lot of profits while also having the ability to wipe out all your assets in a single trade. Furthermore, a risk-management strategy will protect you from excessive leverage losses and store your capital. Nonetheless, you can also rely on online trading for trading operations.

Finding a suitable trading facility can be very time-consuming but do not worry because we are going to suggest a reliable facility called the FXcess. Moreover, this is a facility where you can address your trading and investment queries effortlessly. Also, we will provide you with many advantages like affordable brokers and trading platforms so you won’t face any problem while you are operating trades.

FAQs

1. How can we leverage impact losses?

– Moreover, leverage can impact losses if you implement it excessively, as you normally lose most of your assets.

2. What happens when there is a high leverage?

– High leverage can cause both significant profits and losses in the trading market.

3. How do you define leverage risk in forex?

– The leverage risk in forex mainly indicates the loss many traders experience with their capital when the leverage is high.

4. What happens when you face a 100 times leverage loss?

– The 100 times leverage loss indicates that your losses will be a hundred greater than your spot market trade.

Disclaimer:
This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. FXCess is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.