The concept of leverage is very profitable in forex trading, but also can be dangerous if you are not careful in using it, especially if you are using very high leverage (over leverage). High leverage will cause the minimum margin or minimum guarantees that you pay each time fewer and fewer transactions. This will psychologically affect your trading.
One character successful forex traders are those who can eliminate the influence of emotions when trading. When people talk about the advantages of forex trading, the first time they put forward is usually a high leverage facility, or even very high. With certain leverage, you can open the tens or even hundreds of positions with relatively little capital. This can be done only by a relatively small margin collateral, and that makes one of the charms of forex trading. Nowadays many brokers that offer leverage of 1: 100, 1: 200, 1: 400 and even 1: 1000.
If you are trading on a broker with facilities leverage 1: 1000, then for a contract value of USD 10,000 (commonly called a mini lot) you only pay a margin of (USD 10,000 / 1000) = $ 10 for each transaction (0.1 lot for mini lot ), with the value per pip (pip value) as determined by the value of the contract mini lots (eg for EUR / USD with a contract value of USD 10,000, its value per pip is $ 1). Thus if your capital USD 500 and you open 30 positions (each 0.1 lot) with leverage 1: 1000, the total margin that you need only $ 10 x 30 = $ 300.
If for any position you derive profit of 10 pips, then your total profit is $ 10 x 30 = $ 300, or 60% of your capital. Conversely, if you are experiencing an average loss of 10 pips, then your loss is also 60% of your capital, and in the forex markets such events can take place in a matter of minutes, even if your broker spreads given is zero (no spread).
Psychologically, the higher the leverage you use, then you will be more brave (a lot) in open trading positions, because the value of the minimum margin that you will pay less. Just as if you are driving a car, driving with a speed of 60 km / h and 200 km / h is certainly very different in anticipation if anything happens. Semaki speed you drive, the greater the risk you face when things are not profitable. In many cases, accidents due to driving at a very high speed end in death.
Trading forex with very high leverage can be likened to driving with a very high speed. The risk is big enough. As you know that the brokers lend to you for the rest of the contract value which should be reduced to the minimum margin that you pay. In case you are trading mini lots with leverage 1: 1000, the broker lends USD 10,000 – USD 10 = USD 9.990 for every 0.1 lot (for mini lot) that you open. Have you ever wondered why the brokers do not charge interest on loans to you even if such trading position you hold for days or even weeks?