What is the leverage ratio ? Why is forex trading a risky business ?

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Forex, when compared with other financial instruments, usually offers a much higher leverage. Leverage involves borrowing a certain amount of the money needed to invest in something.  Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money. Margin based leverage and real leverage are calculated basis total trading capital. When trading forex, small changes in the price of the currency can result in significant profits or losses.

Real leverage has the potential to enlarge profits or losses by the same magnitude. The risk is not necessarily related to margin-based leverage, though it certainly influences the same. But the greater the amount of leverage on capital, the higher is the risk.  In order to avoid risking too much money, it is best to have a smaller amount of real leverage applied on each trade as this helps set a wider and reasonable step. It is important to remember that leverage is absolutely flexible and customizable depending on an individual needs. A highly leveraged trade can deplete trading account and racks up greater losses due to bigger sizes.

When trading forex, one has the freedom and flexibility to select real leverage amount based on trading style, personality and money management preferences. One should make use of this wisdom and invest wisely to maximize profits and minimize risk. It is wise to remember that there is no way to make million bucks in one night.

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