About Leverage on Forex


Be careful with leverage in forex trading and how you use it. If you are contemplating one of these "400-1 leverage" offers, you should first know:

  1. The rules about the game you are about to play.


  2. About leverage on Forex and how it works not for you but for the broker.

How The Leverage Game Works


Leverage can be beneficial but it can be your worst enemy. 400-1 means that US$1000 can control a $400,000 position say against the Yen. This is great but it also means that even a small move against your position can wipe your account clean.


This is obviously very bad news for you but great news for the broker!


Why Is It Great News For The Broker?


Forex firms make their own markets - they make the bid-offer price to their clients. They work on the probability assumption (similar to casinos) that as most highly leveraged speculators lose then it's good business to take the opposite position to them.


This is done automatically, so when a client buys Dollars against the Yen, the broker sells short the Dollar. When the client covers the position (either for a profit or loss) the broker is taken out also. If the client wins the broker loses and vice-versa. This is how the leverage game is played. Understanding how leverage works is also cruicial in deciding on which broker to choose for your trading.


So, who do you think usually wins in this game? Yep, it’s the broker. It’s a statistics game and the statistics say highly leveraged speculators lose.


If the brokers stand to gain when a client loses, what is the best way to make sure that the clients lose bigtime?

Easy, let them trade huge positions on a limited amount of capital so that the odds even for the best and most talented traders are pretty much – ZERO.


This is the reason why the ads of '400-1 leverage' are shown all over the broker sites. They are selling you the supposed ‘benefit’ when in turn, the only ‘benefit’ is theirs.


It is important therefore to have an understanding about leverage on forex and how it works. The game basically works this way: The broker is the shark. The retail trader is the shark food. If you want to make money currency trading, give yourself a fair chance and our advice is not to go more than 10x. What's the hurry to make money?


You must overcome greed and impatience to become a successful forex trader. Nothing worthwhile in business or life can be achieved overnight. One of the most popular forex trading systems out there is based on very low leverage.


As you saw in the lesson about Forex Scams, these "marketing guru's" also prowl on the greed of people and their impatience to make money.


Related Links:


Read "Forex Leverage and Margin Explained" in our Tutorials Section.


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