WHAT YOU MAY NOT KNOW ABOUT LEVERAGE

Leverage is using a small amount of money to trade with a large amount of money. Many brokers or market makers offer leverage to Forex traders. For a small deposit one is able to trade with a large amount of money. Brokers offer many types of leverage packages like 100:1, 200:1, 300:1 or 400:1. This means that for every 1 dollar you deposit you will be giving 100, 200, 300 or 400 dollars to trade. Leverage makes trading very profitable for many traders. But there is a major disadvantage to trading with leverage.

DISADVANTAGE OF LEVERAGE

Using leverage to trade is like using a knife that allows you to cut your vegetables but at the same time if you don’t cut properly you may cut off your hand. Leverage has the ability to increase profit and while also increasing loss.

For example one may make a trade using a 100, 000K Standard lot with a 1,000 dollars deposit and make a profit on a currency pair lets say EUR/USD, lets do some calculations:

Let’s say the exchange rate of EUR/USD is 1. 2940.

And pip value is 0.0001.

Lot is 100,000 = leverage

Profit is 30 pips 

Calculation:    (0.0001 * 1.2940) * 100,000 = $ 12.94

          Profit:    12.94 * 30 pips = $ 388.2

BUT if it is a loss and not a gain than it would be a $ 388.2 loss and, since there was only a 1,000 dollars deposit, the present amount left will be:

1,000 – 388.2 = $ 611.8

That’s almost a 40% loss at a time on the used margin.

The above is not a real example, but with it one could understand how with leverage a person could loss a large portion of his or her trading money easily.

 Certainly, trading leverage may be very profitable if used properly but an uninformed use of leverage could result in a loss.

Thank you for reading