Why are higher leverages dangerous in Forex?
This may sound strange at first because this is the sole reason many investors have decided to put their capital into this risky business. Forex has many perks and one of them is the benefit of using leverage. Those who do not have a clear idea of what leverage is, it is when you use a small account to trade for a much bigger order. Imagine you have only $100 deposited in a live account. If you want to execute a trade as big as $1,000 dollars, you would need this leverage. Fortunately, most of the brokers offer wonderful leverages. Sometimes the ratio is 1:400 which means you have the capacity of using 400 times the size of their initial deposit.
Until now, all of these were good. Many readers are wondering why on earth using this amazing opportunity can be dangerous. Well, that is what this article is going to explain in detail. After you have read this post, we are convinced many of you will view this as a danger of the market, rather than a blessing. Looks can deceive and this is very true in Forex.
Positive side of trading
Before we dig deep into the article, you need to know that trading is not complex. By using the Saxo Hong Kong broker, you can open a demo account and try to trade the market without having any issues. You don’t have to push things to the limit to become a skilled trader. Just go through the basics and you will be able to learn a lot about this market. After you become skilled at trading, you will be able to focus on the core concept and able to take the trades without having any faults.
Easy to sweep the account clean
Let’s say, a person has only $100 in their account. An article popped in front of him and told him how professionals have been making 20% of return on their investment. Now, they have $10k dollars in the account which is significantly larger than $100 dollars. At the end of the article, there was something called leverage which enables clients to perform big trades even with a small balance. How wonderful is that?
Without thinking further, our client would use the leverage and open a big order. Earlier, every pip movement would cost him only 10 cents. That means 10 pip positive movement calls for 1 dollar profit. Now, with the leverage bin use, the scenario will change dramatically. Every pip movement will cost profit or loss. Can you imagine how quickly he can lose all the capital if the pip only moves 20 positions? He would be at $20 dollars. Of course, there is a chance to make $20 profit, but the majority of investors fail to succeed.
Everything gets pretty messed up quickly. The first trade is a disaster and he is completely lost. To recoup the investment, he opens another order and this too follows the same direction. What would have taken normally a few months to completely lose the fund at a steady rate now only requires a few wrong steps. Even if the order only closes at 25 pip negatives, he would have lost a quarter of his deposit.
This is the problem with using leverage. Although they are offered for our benefit, greed often blinds us. It is easy to understand that we could become richer quickly by using them properly. The question is how many people can do that? Many have tried but failed miserably. Sometimes it is said the amount of capital you have is the key to success. This is true because investors with big balances do not care for leverage as they have already the option to do so. The problem arises with small-term traders who are dreaming about getting rich quickly.