Joe Ross
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The foundation of the forex industry is leverage. A few years ago we saw how LTCM used $4 billion to leverage over $1 trillion dollars in assets. George Soros used forex leverage to earn $1 billion dollars against the British pound.
On the other hand, this same forex leverage drove LTCM to the brink of bankruptcy and nearly caused worldwide financial meltdown. We also saw George Soros hit with a $2 billion dollar loss in the Russian ruble. When trading forex, leverage is not to be taken lightly.
Leverage is defined as "the use of investment capital in such a way that a relatively small amount of money enables a trader to control a relatively large value". In forex trading there are many instances when you can have leverage as high as 100:1, sometimes even higher. Putting up a few hundred dollars to have a position worth hundreds of thousands can definitely be worthwhile.
An important fact to remember is that, in forex, the money used to leverage a position does not have any intrinsic value. The margin is not a deposit on the actual position. Instead, it is considered "earnest" money, or a "good-faith" deposit .
In forex, the margin is a flat rate that helps put you in the game. This type of leverage can be terrifying for speculators.
Typical Over the Counter (OTC) leverage rules might look like this: You must put up a minimum margin of $1,000 per unit for accounts less than $25,000. Traders must maintain a balance $1,000 or 1% for each open unit.
Such an FX policy permits you to trade foreign currencies on a highly leveraged basis—up to 100 times your investment. An investment of $1,000 would enable you to trade up to $100,000 of a particular currency. A 50% loss in the value of the account, also known as a "draw down" in usable margin, will generate a margin call.
Typically, a speculator new to forex trading will initiate his first trade by getting as many contracts as possible, thereby over-leveraging his account. The greed demon has set in. It is no longer acceptable to get just $7 for every one pip move, it's better to get $70 or more for every one pip move.
Unfortunately, this behavior is not discouraged by the majority of brokerages. Instead, they fuel this greedy behavior. A broker or dealer is paid either on a commission basis or a pip spread, according to the number of contracts his client margins. So it's more profitable for the broker or dealer, at least in the short run, for the client to get as many positions as he can afford to take on margin.
This over-leveraging does a disservice to both the client and the broker. It exposes the client to too much risk at one time, and it forces brokerage to continually get new clients to trade. As a matter of fact, it is not unusual for the first trade a new speculator makes to go against him.
Disciplined speculators know to expect that every trade they take may work against them. That being the case, the disciplined speculator paces himself by investing a little at a time until he hits upon a successful trade.
As is to be expected, even the best trading systems that exist rarely have better than a fifty-percent success rate. Therefore, you must let leverage work for you, and not allow the demon of greed convince you to abuse it.
On the other hand, this same forex leverage drove LTCM to the brink of bankruptcy and nearly caused worldwide financial meltdown. We also saw George Soros hit with a $2 billion dollar loss in the Russian ruble. When trading forex, leverage is not to be taken lightly.
Leverage is defined as "the use of investment capital in such a way that a relatively small amount of money enables a trader to control a relatively large value". In forex trading there are many instances when you can have leverage as high as 100:1, sometimes even higher. Putting up a few hundred dollars to have a position worth hundreds of thousands can definitely be worthwhile.
An important fact to remember is that, in forex, the money used to leverage a position does not have any intrinsic value. The margin is not a deposit on the actual position. Instead, it is considered "earnest" money, or a "good-faith" deposit .
In forex, the margin is a flat rate that helps put you in the game. This type of leverage can be terrifying for speculators.
Typical Over the Counter (OTC) leverage rules might look like this: You must put up a minimum margin of $1,000 per unit for accounts less than $25,000. Traders must maintain a balance $1,000 or 1% for each open unit.
Such an FX policy permits you to trade foreign currencies on a highly leveraged basis—up to 100 times your investment. An investment of $1,000 would enable you to trade up to $100,000 of a particular currency. A 50% loss in the value of the account, also known as a "draw down" in usable margin, will generate a margin call.
Typically, a speculator new to forex trading will initiate his first trade by getting as many contracts as possible, thereby over-leveraging his account. The greed demon has set in. It is no longer acceptable to get just $7 for every one pip move, it's better to get $70 or more for every one pip move.
Unfortunately, this behavior is not discouraged by the majority of brokerages. Instead, they fuel this greedy behavior. A broker or dealer is paid either on a commission basis or a pip spread, according to the number of contracts his client margins. So it's more profitable for the broker or dealer, at least in the short run, for the client to get as many positions as he can afford to take on margin.
This over-leveraging does a disservice to both the client and the broker. It exposes the client to too much risk at one time, and it forces brokerage to continually get new clients to trade. As a matter of fact, it is not unusual for the first trade a new speculator makes to go against him.
Disciplined speculators know to expect that every trade they take may work against them. That being the case, the disciplined speculator paces himself by investing a little at a time until he hits upon a successful trade.
As is to be expected, even the best trading systems that exist rarely have better than a fifty-percent success rate. Therefore, you must let leverage work for you, and not allow the demon of greed convince you to abuse it.
