Leverage In Forex Trading – The Big Problem Of Too Much Leverage!

People don’t always tell the truth about leverage in Forex trading!

Why?

Because when people talk about leverage in Forex they will usually only mention the aspect of it that can be very attractive to traders, being that you need only a small investment to make a large trade.

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. Different brokers offer different levels of leverage, although the most commonly quoted is leverage of 100:1.

This means they will let you trade 100 times more than your balance. For every 1 dollar you deposit you can trade $100, so if you have $1000 you could place a trade worth $100,000.

So, why is this dishonest?

The truth is that using leverage can be extremely risky and you can very easily lose the $1000 you deposited if not careful, and this is something brokers are not overly keen to share with their customers.

Using our example of leverage of 100:1 on a trade worth $100,000, because you only needed $1000 to make this trade, your broker actually loaned you the rest. 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.

Because you were too heavily leveraged in this trade you lost $1000 in the blink of an eye!

So, what have we learnt?

Losing on a trade in this manner would give you a valuable lesson in how to use leverage in Forex, and how not to let yourself 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 a broker advertises they will give you leverage of 100:1 it means you can leverage your account up to 100 times your deposit at maximum. It is up to you how much leverage you use up to this figure, not your broker, and it is often best to use as little as possible to give yourself some breathing space and the best chance of taking a profit.

Learning to be a safer trader

You can start using this advice right away in your trading, and 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 automated trading with robot like the Forex MegaDroid robot, and become a better trader!