How to Properly Use Forex Leverage to Avoid Fatal Mistakes

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How to Properly Use Forex Leverage – An Easy Guide

One of the most common fatal mistakes that traders will make is to use far too much leverage. Unfortunately, the retail trader has nobody to keep them from doing this, which means that they need to use an extreme amount of self-discipline. In fact, major trading houses around the world have risk managers they keep traders from taking on too much leverage, as the temptation is far too great for most people.

The biggest problem with taking on too much leverage is that Murphy’s Law dictates that as soon as you get the “perfect trade”, something will go wrong. When it does, your losses will pile up rapidly. Also, keep in mind that if you were to lose 20% of your account in a single trade, you now need to make 25% returns just to get back to breakeven. Most traders do not focus on what they can lose, but rather what they can make, and that is what makes leverage so dangerous.

One crucial aspect of compound interest is time. You cannot speed of time, although you can make better returns in the Forex market then you can most other assets. However, it’s the extreme amount of leverage that typically ensures that the broker is going to get your money before it is all said and done. Looking at the EUR/USD daily chart, we had recently had a head and shoulders pattern breakdown which should measure for a move to the 1.13 level. However, as I record this the market is coming back to retest the previous neckline for the second time. If this gives way, I cannot help but think of all the over levered short-sellers that are now finding themselves in a very bad position. True, had the market fallen to the 1.13 level right away, they would have done quite well. However, if it doesn’t, their losses will be horrific. I suspect this is a move that if reversed, is going to wipe out a lot of retail accounts.