But what exactly is this leverage?
HOW LEVERAGE CAN KILL YOUR FX ACCOUNT Now, the explanation that most brokers usually give about leverage is this: It is an instrument that will help us to make easy and fast money. how the leverage can be disastrous to an account if not deeply and clearly understood.
That is what we shall be looking at as we go further in this post.
Now, let’s start with a simple explanation of leverage:
What is leverage?
Leverage is a form of virtual credit, which allows us to negotiate in the market with the money of the broker.
Leverage is a necessary feature in the Forex market not only because of the magnitude of the capital required to participate in it but also because the main currencies fluctuate on average less than 1% per day.
Without leverage, it would be very difficult to make profits, even if you have consistent investment capital.
The effect of leverage on a trading account
No doubt, leverage allows you to obtain more interesting profits in a short time, especially if you operate the shares with the CFDs.
However, the leverage effect also presents a risk that should not be ignored.
Of course, the greater the leverage is, the higher the potential gains will be. So, with a leverage of 1: 100, the number of your losses will also be multiplied by 100.
If we look at our previous example and assume that EURUSD goes from 1.25 to 1.24 pips, you would then lose € 1 without leverage and € 100 with leverage.
Now, we will end this post by looking at some tips that will help you use a leverage effect in the best possible way.
The leverage can be especially attractive to new traders who discover the world of Forex for their ability to multiply the potential gains tenfold. As far as Forex is concerned, I’d advise that you use only weak leverage effects, at least until you have fully mastered the market HOW LEVERAGE CAN KILL YOUR FX ACCOUNT.
Before choosing which leverage to use for a specific asset, you must test both the volatility of this asset over time and your investment strategy. Current trading platforms provide interesting tools such as graphs that allow a historical analysis of the asset price or demonstration trading accounts in real market conditions that allow you to trade without risking your capital.
One of which is the Momentum Meter.