July 1st, 2008
Forex Tip - Understand Leverage Or Die
Most traders, usually newbies, focus on things such as trading strategy, charts and indicators. Important elements, no doubt. But lots of forex “victims” miss a crucial point that literally kills their accounts in the first 3 months of trading - they don’t understand LEVERAGE. Leverage is the ratio between the actual size of the position and the amount of money the trader needs to deposit (or set aside) in order to control the position (margin). For example, if the position size is $100,000 and the margin is $1,000, the leverage is 1:100. It means that in order to “play” with $100,000 the trader needs to set aside only $1,000 for margin. If the leverage is 1:200, the trader will be able to control $100,000 with only $500 and so on. Some forex brokers offer leverage up to 1:400. But leverage can kill you. And that will be a quick and painful death.