Forex Leverage - It Can Be Your Friend Or Enemy

Forex leverage in the wrong hands can be something that destroys accounts faster than a speeding bullet.

Forex leverage in the wrong hands can be something that destroys accounts faster than a speeding bullet. 

One of the most common mistakes that new traders make is that they become completely overleveraged.  They love the idea of high stakes=high reward that they’re out of the game before they knew what hit them.

Forex leverage is always going to be a double-edged sword.  When everything is going your way, you wish you had the option of using a 1000:1 leverage.  When things aren’t going your way, a 100:1 leverage feels to dangerous.

I believe the most dangerous thing in the world is a new trader who has had some early success.  The moment greed hits them, you know it’s over.  You know it’s only going to be a matter of time until their ego gets in the way, and they risk too much.

All it takes is just one overleveraged position to put everything back into perspective for you.  You realize that you aren’t a trading God, and can’t control the market and tell it to do what you want it to do.

So, why do brokers allow traders to have high leverage? That’s simple….so they can make more money.

Think about it, most brokers are going to earn their money with the spread (difference between the bid and ask price).

To give you an idea, let’s say you deposited $500 in your account, and on a 100:1 leverage, you could trade theoretically $50000 and a $5 pip value.  So, on a 4 pip spread, the broker makes $25 on that trade.

Now, let’s increase the leverage.

Let’s say you used a leverage of 500:1 on that same $500.  This would let you trade $250,000 with a $25 pip value.  All of a sudden, the broker now makes $125.  What kind of leverage do you think your broker wants you to make??

It’s not like the broker loses money if you do.  They make their money irregardless.   So, as I mentioned the idea of all this buying power with such a limited amount of money may seem like a wonderful idea to a new trader, but they really ought to know what they are getting themselves into, before they just jump in.

Not only do you want to use leverage in the right manner, you want to use it to your advantage.  We’re not playing the slots in Las Vegas, here.  You’ve got to come at this with a more level-headed approach. 

To give you an idea, if you have taken a trade and it’s gone in your direction, a good idea might be to close out some of your trade, and bank some money, move your stop loss to break even, and add more leverage position.

This is a smart and safe way to use leverage, because you are using it on your profits.

You never want to play with more money that you can afford to lose.

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