15 August 2013
The Dangers Of Highly Leveraged Trading In Forex
If you are a forex trader considering one of these '400-1 leverage' offers, you should first know:
1. The rules of the game you are about to play.
2. About leverage in forex and how it works, not for you, but for the broker.
Here is how it works:
Leverage can be beneficial but it can be your worst enemy. 400-1 means that US$1000 can control a $400,000 position say against the Yen. This is great but it also means that even a small move against your position can wipe your account clean. This is obviously very bad news for you but great news for the broker!
Why Is It Great News For Them?
Well, the first thing that traders must realise is that Forex firms make their own markets - they make the bid-offer price to clients. They use the assumption that as most highly leveraged speculators lose then it's good business to take the opposite position to them.
This is done automatically, so when a client buys Dollars against the Yen, the broker sells short the Dollar. When the client covers the position (either for a profit or loss) the broker is taken out also. If the client wins the broker loses and vice-versa. This is how the leverage game is played.
So, who do you think usually wins in this game? No, not you. It’s the broker. It’s a statistics game and the statistics say highly leveraged speculators lose.
Ok then. If the brokers stand to gain when a client loses, what is the best way to make sure that the clients lose Bigtime?
Easy, let them trade huge positions on a limited amount of capital so that the odds even for the best and most talented traders are pretty much - ZERO.
Why do you think that the ads of '400-1 leverage' are splashed all over the brokers websites? They are selling you the supposed ‘benefit’ when in turn, the reality is that the only ‘benefit’ is to them.
If you want to play the leverage game in forex, understand how the game works. The game basically works this way: The broker is the shark. The retail trader is shark food. If you are serious in your quest to make money currency trading Â– educate yourself on the risks involved.