If you don’t know how to use leverage in your account trading, this article can be helpful.
Generally, traders use leverage to generate more returns on risk capital. They can control much more significant amounts in a trade.
Many new traders use enormous leverage because they open a micro account with only a few bucks. Leverage is the most common reason why forex traders fail.
The history of trader Jack.
Jack finds a broker and opens his account to trade forex with a MetaTrader platform. He deposits 1.000$, and he chooses a 1:100 leverage.
He is ready to open his first trade. He sells 0.01 lot of EURUSD. How much is 0.01 in money?
- 1 lot = 100.000$
- 0.10 lot (mini lot) = 10.000$
- 0.01 lot (micro lot) = 1.000$
With an open trade of 1.000$ with a 1.000$ account, has Jack invested all his money? No.
As you can see, Jack has a free margin of 988.88$. What’s happen? Jack “is borrowing” money from his broker to leverage his investments.
Jack needs to guarantee only the loss with his deposited money so that he can open another trade.
He decides to open a Sell trade on EURUSD, this time he buys 50.000$.
Jack is 50.000$ invested, but with his 1.000$, he still has 442$ of free margin.
Jack is pleased, with only 1.000$ he bought 50.000$ and he is a professional trader. He closes the platform and goes to lunch.
At 2 p.m. a news impact on EURUSD that start to rise. With a 50.000$ position size, every pip values 50$, after only 20 pips Jack’s account blow up. When Jack finishes his lunch, the broker closed his position in a margin call, and it’s the end of Jack’s career.
The lesson is: don’t use leverage over 1:5 and NEVER leverage overnight. When you open an account, don’t choose big leverage, many times trader overtrading with their account, without leverage it’s harder to go wrong.