Leverage as an Equalizer to Risk

Written by JS T Alexander | 21 August 2009

In Foreign Currency Trading...

It is a given fact that there exist a considerable risk inherent in trading the "Foreign Exchange Market". As exchange rates increases, so does speculative capital do. The reason is that, as active prices move at a rapid pace,

most investments make more than a reasonable return than simply placing the funds in stocks and money market placements. That said, it takes the investor a shorter period of time in making the interest on the investment. Although, the risk is something that has been considered it is well worthwhile as compared to the slower pace of the stock market performance.

Leverage has indeed made its mark in almost all financial instruments. But the liquidity and flexibility that it offers the foreign currency trading could be enormous, that is when it is managed and properly executed. Being able to use the extra leverage in an investors account can be a cushion against any negative effects while in the market place. Hedging strategies can be applied with the leverage provided to absorb not only the directional price movement contrary to the position, but with the approprate leverage in a new position could build and add equity made on top of the investment capital from the leverage position.

This is a strategy where most traders apply whenever the market moves against their favor. Managing the risk is an art in itself, done by strategists who has been trading the FX market for some period of time. By building up additional equity on top of the initial investment, this enables the investor some breathing room that any future loss in the trade could be paid from the equity built and not from the main principal. Money management through proper fund allocation can play a vital role whenever a trade plan is developed even before entering this volatile market.

Hedging strategy is commonly applied whenever any trade position is affected negatively when the price action goes opposite to the existing position. And this happens most of the time especially when trading the foreign exchange market. Upon entry, the tendency of prices is to move against it making the trader doubt whether that position to buy or sell is correct. In most cases, traders need to consider breakeven points corresponding to the price. For there are spreads and commissions to be looked at even before such execution is made. The trading plan for scalpers or day traders so to speak, is to make between
10 - 50 pips in as much time allowed while being in the market. Although, one needs to consider if the trader is willing to take the gains in between those pip objective; how much would the trader be willing to tolerate a loss. If the tolerance point is also between 10 - 50 pips loss side, then ther is no rational or logical reason why such a trade should be made. It is considered to be a 50 - 50 chance basis. Rational and logical approach should always be present at all times while trading. The profit potential and objective should at least be three (3)X times as against a loss of one (1). This is self-explanatory.