Leverage In Forex Trading The Real Dangers Of Too Much Leverage!

Submitted by: Mike D Weaver

You have been lied to about using leverage in Forex trading!

Why?

Because when people talk about leverage in Forex they focus in on its unique selling point, which is that it enables a trader to control large trading volumes with only a small investment.

Forex brokers are especially keen to tell you about how much leverage they will give you just to get you to open an account with them. A typical broker will often advertise the ability to leverage your account with them at a hundred to one.

This means that you can trade 100 times what you deposit. For every 1 dollar you deposit you can trade $100, so if you have $1000 you could place a trade worth $100,000.

So, where is the dishonesty?

Well, the dishonesty is that brokers are not usually up-front about the risk involved when using leverage in Forex, and just how easily you can lose your $1000 when using this amount of leverage.

If you use leverage of a hundred to one in a trade worth $100,000, you only need to put forward $1000 and your broker will in effect ‘loan’ you the other $99,000 needed to cover your trade. In order to make such a large trade, you have to put forward a percentage of it as security, or as leverage.

In Forex trading we all know how volatile the market can be, and a trade will often move against you before turning round and going into profit. If your trade moved against you by just 1% it would wipe out the $1000 you put forward yourself.

Now your broker will not be prepared to lose money himself on your gamble, and will act to protect himself from losing on your trade. As soon as your 1% of the trade is wiped out he will close your trade for you. This is called a ‘Margin Call’, and is necessary for your broker to ensure they don’t actually put their own money at risk.

Now the trade you placed may have been a good one which turned around and moved into a profitable position. It’s too bad you won’t make money on it though, because your trade got cancelled when it made a small movement against you first.

You just lost $1000 in the space of a few seconds because you were too heavily leveraged!

So, what have we learnt?

The important lesson here is that when you apply the principles of leverage in Forex trading, do not allow your account to become too heavily leveraged. You may as well flush your money down the toilet as place it on a trade where you have no room to manoeuvre.

When leverage of a hundred to one is advertised it means that this is the maximum you can leverage your account – by 100 times what you deposit. You don’t actually have to use the full amount of leverage offered though, and the less leverage you use the more breathing space you will have if your trade starts to move against you.

About the Author: Stop putting your own money at undue risk by relying too much on

leverage in Forex

. Learn more about different trading strategies, such as

Forex arbitrage trading

, and trade smart!

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