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Why is Forex leverage referred to as a double-edged sword?



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Hi Milan,

The benefit of getting high leverage in the Forex market is what allures most investors into it. You may have heard about leverage; however, there is a high possibility that you do not know how it works, what it means, and its effect on your trades.
In leverage, you borrow a specific amount from your broker that you need will need while investing. The leverage that the Forex market offers is usually high; therefore, you will be controlling a massive amount of money when you get this initial margin.
To get the margin-based leverage, you should divide the total transaction's value with the margin amount that you should come up with. The amount of leverage that you will put up will rarely affect your risks, which means that your profits or losses will not be affected by the value of your margin. The reason for this is that you can always allot more money than the margin required. Therefore, the actual leverage is what should help identify your profit or loss. To get the real leverage, you divide the full face value in your open market positions with your working capital.
Leverage in the Forex market is usually about 100:1. This intimates that, for each $1000 you have in your account, the value that you can trade can add up to $100,000. Many Forex investors trust that the leverage functions as risk, and that is the reason why Forex brokers offer it in large quantities. Forex brokers will not be offering this kind of leverage if this risk is unmanageable.
The real leverage may either magnify your profits or your losses. If you apply for high leverage, then you will be signing in for a higher risk. The margin-based leverage may not come with such hazards; however, you need to be cautious when dealing with it.
Once you learn how to manage leverage, you are assured that you can deal with it, and there should be no need to worry about taking it. If you apply the liberal approach while trading, then you should never use leverage. You will only succeed and make significant profits if you manage your leverage carefully and thoroughly. You may earn good money or, at the same time, lose a fortune for using high leverage; this is the meaning of leverage as a double-edged sword. 

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