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Risk and Forex Leverage

Do you think about trading in the forex market? You know it is risky don't you ? You know that many traders (especially the beginners but not only them) end up losing money and for many of them it is a substantial part of their net worth. Some new traders are attracted by 1:200 or even 1:1000 leverage that some brokers offer. They theorize that the leverage can be used to generate a substantial amount of wealth. Well, every coin has two sides. High leverage often ends in tears. And yet, it is one of the major advantages of forex.

The traders can borrow money from your broker and put them into the trade to multiply their profit. This is forex leverage. How much? There are no universal rules of how much you should borrow and it does depend on the type of forex strategy you use. Suppose you have a $10,000 trading account. With the leverage 50:1 the broker would allow you to open positions to the value of at least $500,000. The position size is 50 times the size of your account. But everything comes at a price. Borrowing that money will increase your profits, but it will also increase your losses.  Remember that it would not take much of a price movement in the wrong direction to cause a significant loss to your account.

To be a successful forex trader, treat your wins and losses as business. It is unlikely that you could put $200 in to a business and turn it into $20,000 in a short frame of time, right ? Now apply this idea to forex trading! Be realistic and aim for realistic returns. Think about the stock market or mutual funds. They often earn less than 10% per year on average. If you can make 30% per year trading forex, that is significantly higher! Don't expect to make $1,000 a month from your $100 account. It almost certainly will not happen.

How does this apply to the forex leverage? Very simple. With a smaller leverage used  on each trade, you give your strategies more breathing room by setting a wider but reasonable stops and keeping away from too much risk. A highly leveraged position  can quickly eat up your account if it the market goes against you. Finally, the idea of trading profitably is not about making your millions by the end of this month or this year.  It is about learning, increasing your annual profits until they are stable and developing your personal trading strategy.