What is leverage? Why do I need it?

Written by Trader Maker

The risk with leverage is that the profit potential can go both ways where a 1% swing in the markets can double your investment but can also cause you to lose your entire investment. In fact there are two golden rules when trading with leverage. First is that you cannot lose more than your initial investment and the second, more leverage means less range of Pips for a trade in case of market fluctuation.

Remember, when you trade you're not just profiting on the basis of the total amount traded; you're also potentially losing on that basis. So keeping track of your pips risk is highly important. In times of market volatility, currency pairs for example can move hundreds of pips on a daily basis. As the table shows this makes trading with higher leverage a risky business.

The greater the initial amount and margin you invest in a position, the more able you are to maintain the position through time. Since some market analysis will give you forecasts in months, weeks or days, it can make sense to be in the market for the longer run if you're seeking to make trading an investment.

The table below illustrates this example*:

How much leverage is right for me?

Ultimately everyone trades in their own way – some traders take a measured, patient approach and others prefer a rollercoaster ride. There's no one right way to trade so long as everyone is aware of the risks they're trading style involves.

The level of leverage each trader chooses to utilize depends on the individual style of the trader and does not inflict on his experience. Some traders use high leverages to potentially realize quick gains for short time intervals ranging from several minutes to several hours while some traders choose to utilize lower leverages and trade for longer terms over several days, weeks or months. However before you realize what kind of trader you are, it is recommended to start trading with lower leverages and carefully manage the risk involved allowing yourself to gather experience and confidence while building your trading strategy.