Managing Risk With Leverage

LeverageTo be able to manage the risk with leverage in FOREX it is necessary to know the principal concepts.

  • Risk: Risk is a common term in financial language. The risk measures the amount of money you risk to be able to measure the reward.
  • Leverage: We can define leverage with the next sentence “the ability to control a huge amount of money using very little of your own money and borrowing the rest.

As it is known, FOREX trading has become a daily job; it’s easy and profitable. Anyone could be a FOREX trader.

First of all, we need to know how to work with FOREX and what is it about.

Well, it is also known as FX, currency trading, or foreign exchange. FOREX is a market that is decentralized, and the most important thing is that it’s a global market. It means that you can trade all the currencies around the world and you can make out of this your job.

So, making it simple, trade is to exchange services between two or more parties and the foreign exchange is about trading currencies.

You can only exchange your money into other currencies; once you learn to trade, you can trade your currencies on what you think is the right value.

Having that in mind, if you want to trade up or down, you can do it; if you want to buy currencies, you can do it; if you want to sell them, well, of course you can do it as well!

Now that you are getting into a new world where things can go wrong, there is something that, even if it’s hard, it can be helpful if you want your work to be profitable; that is the FOREX risk management.

FOREX risk management.

When you are a trader, you need FOREX risk management strategies; here you can find some of them:

  • Martingale
  • Anti-martingale
  • Speculation

All these strategies are going to be helpful as soon as you start working in FOREX.

It is also really important to know the probabilities of your trade. If you can measure the risk, you can definitely manage it.

When you are a beginner in this amazing trading market, you can make some mistakes and do things totally wrong, like if you were gambling. Gambling is nothing more than the act of trade without any risk management rule.

This affects risk managing and it is certainly going to affect your pockets. Gambling can bring things like more losses per trade or volatility.

Tips you must apply in your risk managing strategy.

  • You can’t trade without rules about risk management. It is necessary to have a schedule and a journal where you can write everything you did and everything you are going to do; because, if you don’t, you will be gambling.
  • Risk management rules will make you a lot more profitable in the long run since it will teach you how to manage your money and how to manage loses.
  • Never oversee the fact that risk can be magnified (in relation to your trading capital) if you use too much leverage, which is a truly huge mistake.
  • It is essential for you to take a few risks in your trade career. That’s because the truth is that taking on a couple of risks is going to be the only way to learn how to be good at trading. You just need good trading habits.

Managing risk with leverage.

Trading with leverage is using the broker’s or bank’s money rather than the strict use of your own money. It has the objective to instantaneously increase your trading capacity.

It is important for you to know that leverage amplifies any risks or any kind of imbalances that can exist in any trade you are trying to do.

When we trade and we need to manage risk, what would be the relation between risk and leverage? Does that affect the trade?

Well, it’s actually really simple. As I said, leverage just amplifies pre-existing risks in the trade; that means that what it truly matters in the trade is not leverage but the fundamental risks in the trade.

Now, when you are trading it is vital to understand that the higher your leverage, the higher your risks, and that is something that doesn’t help you as a trader.

On the other hand, if your leverage is low, your risks will be low too, but it all depends on the way that you manage your risk and not the way that you manage your leverage.

While the truth remains in that leverage can greatly increase how much you lose, if you have a good trading strategy and you know how to manage risk, the leverage won’t really be a problem for you.

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