Why is gaining too much leverage through forex margin trading a dangerous thing?
If you have already read about the concept of leverage in forex by trading on the margin, you’ll no doubt understand that it’s rather a powerful tool. A typical margined account will offer you a 1% margin, therefore you simply deposit 1% of the full total value of one’s trades (with your broker lending you the other 99%).
Lets say your account deals in lots of $100,000 each, so as to buy a lot at this point you only need to invest $1000 of your money in that trade (1%). Now this deal may seem like an amazing offer, also it does allow the ‘average joe’ to have a piece of the action without needing a couple of hundred thousand dollars to spare. However, there’s one big caveat you shouldn’t overlook:
Trading on a margin of 1% means a fall of 1% of one’s trade will put you out from the game!
Forex margin trading permits you to minimise your financial risk, but the flip side of the coin is that when the value of your trade dropped by the $1000 you put forward it will be automatically closed out by the broker. This is called a ‘margin call’.
As you can see, a little movement in the incorrect direction could easily wipe out your trade, and see your $1000 gone in a couple of seconds. If the trade moved enough in the right direction to cover the spread then you could make a good profit, but you would need to be absolutely certain in your prediction to make such a risky trade.
Forex margin trading on a 1% margin is risky business, but by obtaining the balance right between your degree of risk and how heavily leveraged you account is you can gain an advantage. This advantage could be the difference between success and failure.
Important: Gaining AN EDGE in Forex Margin Trading is key to Your Sucess!
Learn more about forex currency trading strategies [http://forexmentalist.com/forextrading/forex-trading-strategies-leveraged-trading/] and margins, and know the pitfalls the brokers make an effort to hide!