Ignoring leverage: Why most new forex traders fail!

Most traders fail not because they have no skill of trading or they are unfortunate but because they want to use leverage and they don’t understand how leverage works in real sense.

It doesn’t matter whether your broker gives you a leverage of 1:100 or 1:400, or he tells you that you can actually trade 10,000 units with an account as small as $100 dollars,  what matters is, Do you know how  leverage works?

Thanks to our forex brokers you are able to use a big size with your small capital account and compete with those having large accounts. In this case you can control a mini account using just $100 that means your broker will allow you to trade 10,000units or use a size of 0.1 with a leverage of 1:100. Isn’t that fair enough? Of course it is. Actually it’s very exciting thinking about the whole calculation.

Let’s do some little math, imagine depositing $100 as your starting capital to trade and your broker allows you to hold a position as big as 10000 units.

This means if you win 1% on each trade, you earn 100% of your actual deposited money. Ok let’s do this; your deposit is $100, with leverage your account became $10000, considering a winning trade (1%×10000) =$100 as profit.

In actual sense your account gets doubled in just one single trade to $200. Who doesn’t want to double his or her account in a single trade? That would be the very best news a forex trader would want to get.

But forex is a probability based investment, so we have to always consider two scenarios; a loss and a win. So what if our first trade taken came out as a loss. This would mean that we are risking 1% of $10000, we would make a loss of $100.

Bearing in mind that actually the $9900 is borrowed money from the broker, so what now? The whole account is wiped out. And before you could finish running your first trade you are receiving a margin call that you have got insufficient balance and the broker closes your trade. Ooh No! What a stub in the back.

This is one of the dangers of using a high leverage on a small account, exposing your account to 100% risk in your ignorance and your account suffers the consequences.

Leverage is a double-edged sword

All you need is to take precautions on all that brokers tell you. It’s not that you don’t succeed when you use leverage, but you have to consider different factors before you take in that choice.

But suppose you were risking 1% of your actual account (no leverage) on each trade which is (1%×100) and the trade goes against you , you would only lose $1. That’s safe but boring.

No matter how badly you want to double your account or achieve your million dollar dream, don’t use a standard account or mini with such a small account. Start trading using a micro and first develop your account till it is big enough to trade any position of your choice.

Leverage is good but only when used in a proper way.

In our next lesson we shall take you through what leverage is and how you can avoid big drawdown when using leverage

 

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