The Truth on Leverage

A large amount of leverage that is obtainable in the world of currency trading can work against you as well as for you. Leverage can lead to huge losses as well as gains. Leverage, as it called in Forex, is the process whereby a trader may borrow money from the broker to trade.

You can say that leverage is a double-edged sword. It is a dangerous tool if it not used carefully. Like the element of fire, leverage makes a good servant but a bad master. Most traders who first start trading do not understand this concept of leverage. Of course if by chance they survive their trading for more than nine months, the idea of leverage slowly sinks in. Unfortunately, only about 5% of these new traders make it to the 9-month mark and beyond.

The issue with leverage is that it often offered to the unsuspecting traders as a form of bait. Traders do not notice that and tend to take the enormous amount of leverage possible.

The author knows from bitter experience just how painful and difficult it is to lose close to 60% of your account then take six months to make it all back again.

Note: Leverage that is offered by brokers can range from as low as 1:20 to even as high as 1: 500 for retail trades. For institutional traders, the leverage can go as high as 1:1,000 depending on the size of the trade. But if you are smart and know how to use this powerful tool then, you can potentially sky-rocket your trading profits!

Note: Not everything in this world is made equal. You got to be careful about where you tread.

Tip: Statistics have shown that most new traders are over-leveraged. The reason is that most new traders do not adequately fund their account at the onset.

Let us digress a little here; to fund your account, some brokers will take as low as $50. If you decide to do that, then we suggest that you take that money and save it aside. Keep saving that cash till you have at least $500 in cash before you even think of investing in forex. An underfunded account forces you to over leverage, let’s face it people; we are greedy by nature, so being greedy we will try to take the short-cut, and that way leads to financial ruin.

The best way for traders would be to take the smallest leverage possible. The idea behind leverage is that if you spend $1 to make $1.50 then if you borrowed $10, you would be able to make $150.

So with your original $1, you get to make $50 worth of profit. While this may be a possible case, you must also remember that should you lose the trade (highly likely) then this high leverage works against you.