As a huge arena for making serious profits Forex reminds me of a pendulum swing: when it goes aside we should not forget that it certainly comes back. Beware! Forex huge profits also mean the potential dangers. Some of them, for instance, come from the outside (e.g. false information from so called “experts” etc.). And some of them are actually the creations of traders themselves. We now speak about self-created FX myths.
Here comes the first one – Forex gives an immediate and huge profit. It’s not even close to the reality. Even opposite. The actual statistics is harsh: more than 90% of all trades in the FX market turn into losses. So this is what you may get in the first place. Not profits.
Misconception №2. Jumping into a trillion-dollar market without any preparation (mental, physical and emotional). Just say: you would never drive a car before you get a license and really know how to make this damn vehicle move from your garage. Without making researches, having sufficient funds and correspondent knowledge you’re going to crash into one of the Forex “poles.”
So before “driving” the Forex roads, you better start a demo account and study the industry. Or… you’ll be meeting your “multi-$$$” fortune only in your dreams
Beware of Leverage and Care for Your Margin
Some people believe that the Great Pyramids in Egypt were created by aliens. Indeed, how could the stone blocks (2-6 tons weight each) be put together as tight as possible on that height?! Historians are pragmatic. They say the Egyptians used long angle levers and the leverage power which actually helped us to get one of the greatest world’s miracles.
However with Forex the picture may be different. The one thinking high leverage is a base of success will fail sooner or later. So what is leverage itself and how it refers to what is margin?
Let’s consider the situation. You are willing to get a bank loan to purchase Hugh Hefner’s “Playboy mansion” with all of his housekeepers (somebody has to do that someday!). But you can’t afford this deal in front so you go to the bank. It checks your salary and sees if you are capable of paying installments per month. The bank allows you to leverage the salary and therefore, loans the money needed for the House of Dreams.
So leverage here is the ability to use your available funds to have more money borrowed from an external body. Margin is basically your capital.
High Leverage is a Killer
Remember the pendulum I spoke in the beginning? With high leverage, it makes a strong move aside: you can open positions worth hundreds of thousand dollars with your only five hundred or less. It’s attracting, isn’t it? So think many people drawn to trade Forex. However, the closer glance discovers another danger – the pendulum might surprisingly come back. So trading with leverage of 100:1, 200:1 or 400:1 can easily destroy your account. The bigger leverage is the more change of currency rate influences your account.
Every $50,000 of the account means one standard lot. This is the way many professionals trade. Mini account then means trading one mini lot for every $5,000 of the account, etc. If pros do like that, why newbies think they will definitely succeed trading thousands of dollars with their $50?
Because some brokers say YOU CAN! Most of them impress newbies with incredibly high leverage available. If those brokers are not the Gates family going for charity – it is not the kindness but the attempts to lure you into trading. Stop and consider your abilities! My advice is the less leverage, the better.
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When Volatility and Leverage Unite
Market volatility is one of the primary characteristics of the Forex market. Already high volatility becomes even higher with leverage. Your risk per lot rockets as well. If you are so cool trading with no leverage, you might lose the only way – if a currency lost all the value. Imagining that with Dollar or Euro is an Apocalypse (where Mr. Bruce Willis is powerless), but unlikely. So, no leverage in trading these currencies is more than just safe.
Let’s turn to school and math. I have 40 trades per month with leverage of 20:1 and 5 pip spread. I have already “deserved” $4,000 expense without losing a single trade! If my bud-trader loses %35 of the trades (not so bad, you know), he will lose 14% of his account in the end. If you are a bright mind, you will turn the scenario to your side and break even. Alternatively, you will fail as most traders do.
Next “hit” from leverage is the distraction. You are losing focus from market developments what makes you obsessed by volatility and your personal account evolution. Big chance to end up with incorrect conclusions about your strategy.
No leverage – alike an old movie. Less visual effects show the real actors’ play. Your Forex accomplishments reflect the success of your trading tactics (not leverage). High leverage can both drain your account and “steal” your trading logics.
In conclusion, high Forex leverage is like a mighty sword of a Middle-Age warrior. If it’s too big and heavy to handle it makes no use and can’t protect him. High-leverage-offering strategies are developed by marketers of various brokers. Their thinking scheme (as we talked above) is clear: high leverage gives traders small chances to get on top, so these would be market makers who would profit from our losses as a total result.
Article was written by Alexander Collins, who is CEO of Forexeasystems.com Creator of currency trading system and Forex expert advisor that works since 2007.
