February 9, 2014

Overleveraged Forex Trading Strategies

Forex Trading Strategies

The forex market is available to the common man. This means that even if you do not have enough funds to back your efforts in the forex market, you can still trade in it. In fact, you can take what little funds you have and turn them into riches provided you have control over the forex trading strategies that you plan on using.

All this is made possible in the forex market due to a concept known as leverage. Even if you have chosen your forex trading strategies and are about to start trading, you should find out more about the concept of leverage because you may be on the verge of making a critical mistake.

Why Do Traders Use Leverage?

You need to understand why traders use leverage in the first place in conjunction with their forex trading strategies. The purpose of leverage is to increase the purchasing power of a trader. It allows the trader to trade with more money in the forex market than what he invests in his own account.

Leverage makes the forex market accessible to individuals with insufficient funds. Forex price movements happen in decimals. This means that unless you have a lot of money in a trade, you will not make much profit. Leverage thus helps increase your position size to a point where profits become substantial.

Why Do Traders Overleverage Their Positions?

Overleveraging means using leverage levels that are too high. It is a problem because using too much leverage not only increases the position size and the size of potential profits but also the size of potential losses.

Despite this, many traders overleverage their forex trading strategies and make their effects redundant in the market. There are many ramifications of overleveraging. Consider the following.

Overleveraging Means Emotional Pressure

First and foremost, overleveraging causes a lot of stress in a trader. Because the size of losses can be too much to handle for forex traders, the act of ignoring the steps of their forex trading strategies and using too much leverage can often affect traders emotionally.

Furthermore, lack of emotional control then causes them to make bad decisions in the market which, in turn, causes losses.

Overleveraging Means Financial Restrictions

When you use leverage, you are required to have a certain sum of money in your account to service the leverage that you have taken. Therefore, when you use leverage, you tie up a certain part of your account. Therefore, the moment you decide to ignore your forex trading strategies and use too much leverage, your finances come under undue pressure.

Overleveraging Means Margin Calls

In the end, overleveraging can result in a margin call being made on your account. Margin calls are made when the money in your account is insufficient to support the leverage that you have used.

More importantly, if a margin call is made against your account then the system would automatically start closing your open positions in the market up until you have sufficient funds in your account to support your leverage again.



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