Leverage

The most fascinating thing about forex is the enormous amount of leverage available to all traders. Most new traders are lured to the market by leverage. The seduction of leverage can be as fatal as it can be thrilling.. Leverage is virtual credit received from your broker on your margin. Margin is the actual amount of money you deposit into your forex trading account. Leverage multiplies your margin by up to 500 times. So, for example if the margin (actual deposit) on your account is US$1,000, it means you can make trades of up to US$500,000 i.e. the broker “loans” you US$499,000. However, you cannot withdraw the leveraged amount, it is virtual credit, you can only use it to trade.  You earn or incur the gains or losses that result from using leverage and these affect your margin. Simply put, where your minimum gain or loss is US$1 without leverage, this becomes US$500 with leverage and these gains or losses are added to or subtracted from your margin. Such an effect is obvious. Whether this scares or excites you gives an indication of your attitude towards risk. The basic principle is the higher the leverage used, the higher the potential risk but also the higher the potential gain – your risk and profit are multiplied by the same leverage factor.

The improper use of leverage is the main reason why traders lose money in the markets. It’s a lot like driving; the speed at which one drives is dictated by the conditions on the road and the driver’s attitude. It’s obvious to say a good driver adapts his/her attitude to suit road conditions. Always driving too slow or too fast is a model for disaster, so is being a “raging bull” in traffic and a “snail” on the highway. Manage your use of leverage properly through money management so that as your account balance increases so does your use of leverage and vice-versa. I will explain this further in money management.

Remember, a good trader makes use of all the tools available to him/her; the trick is to know when and how.

Be abundantly blessed!

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2 Responses to Leverage

  1. Kisstopher says:

    Inga hamusi kuita mdara!!!!

  2. I like what you got going here

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