Manage Leverage Risk in Trading Forex
Therefore, a higher leverage ratio means a higher profit when the trade is running correctly. If the asset moves in the opposite direction, the highly leveraged trader loses more money than the low-lying trader.
New traders often overestimate the powerful effect of this feature and tend to apply high leverage all the time. This is not always the best practice. On the other hand, experienced professionals understand the risks of too high leverage. To reduce the risk, they can usually use a low level and produce smaller weight gain in the long term.
As an example. In January 2015, the Swiss National Bank was surprised when it released the Swiss Franc from the Euro. This led to a major change on the ground, which resulted in almost sudden bankruptcy. Many traders who lack Swiss Franc—and don't protect their trades with tор loss—lose their entire trading account balance in a matter of seconds.
To reduce risk, brokers tend to lower their leverage when the market is very volatile. Some of these events occurred during major elections, large referendums, and major server data releases.
OсtаFX protects traders from these extreme events by offering Negative Balance Protection. The possible loss that you experience is an investment in trading.
Bottom line
Leverage is a double-edged one. When trading is going well, traders with high leverage make more profit. When trade moves in the opposite direction, losses can often exceed the total account capital. Since all traders make mistakes, the secret is to find a good balance. For new traders, it is advisable to first understand the meaning of leverage and margin. Then, they should start trading with the minimum available leverage. As they become more experienced, they can then raise their level of control to a level that does not expose them to many risks.