I have been giving things a little thought and my thoughts turns to the whole concept of leverage.
I might have hold of the wrong end of the stick here but isn’t leverage for the most part a complete myth.
I can only leverage against what I have in my account,if I haven’t got any money in my account then I cannot leverage to an amount that exceeds that which is in my account.So when the broker offers you this shiny leverage mechanism all he is doing is using my own money to give the impression that he is allowing me leverage.
Its a bit like having an overdraft facility in a bankw hen you actually have plenty of money in the bank in the first place.
Am I wromg about this if so can somebody explain why leverage is in any way an advantage.
Kind regards
Rodders
It might be as well to search the forum for answers before posing a question that has been done to death and I responded to less than 2 weeks ago. To recap; allowed leverage as defined by the broker dictates only how much money you need to have in the account to open a trade of a given size (ie at 400:1 a quarter of what you would need at a 100:1). However utilised leverage that you define by your trade size and stop placement relative to your account is critical and you need to ensure that you understand this thoroughly or else you are toast out there
I see all over the place suggestions that we should demo trade for anything up to 2 yeras before trying real trading.
Does this however discount a persons ability to learn,and their psychology.
I also read everwhere that only 5% succeed as forex traders…how true is that.I feel it make be incorrect becuase there seems to be so much enthusiasm and knowledge displayed for an activity with such a small success rate.
Myself I am a very slow learner,but have a risk taking mentality making my money out of UK and Irish horseracing,and Sports trading.
But I am willing to put the work into Forex…but not if that is going to take 2 years of demo trading first:(
I think you should ignore the specifics Rodders since in any individual case who knows? What I would say is that people leap in much too quickly and usually lose a heap of dough before recognising it aint that easy. From one of your other posts you doubt the ability to make a living from this so you perhaps need to deal with that issue first. After that recognise there is a learning curve and you want to manage that with the minimum of losses. Where are you from in Wales? I went to college at what was then called the Welsh National School of Medicine. A lifetime ago and boy do I remember Caerdydd as wet!
No it’s not a myth you are completly wrong. Leverage is not like an overdraft in a bank. When you go to a margin call, you don’t go to negative, and depending on your lot size and leverage ratio, might not even get margin called to 0. you could have money left in your account.
Say I have a 400:1 leverage ratio set on my account. The ACTUAL leverage, not the amount of my account I decide to leverang and trade.
400:1 says that for every 400 dollars I trade I need 1 in my account to cover the trade.
This allows me to trade a larger much larger lot size than if my account at 0 leverage or 1:1.
A 1:1 would also make it harder to manage risk AND still make money. The usual risk scenario is to risk no more that 2% of your account.
With low leverage you need more money in your account to cover a trade. So, if you are sticking to a 2% risk percentage and have no leverage or 1:1, you are forced to trade MUCH smaller lot sizes to keep to a 2% risk factor.
As lot size goes up the per pip value goes up. You make or lose this amount when a trade goes positive or negative.
With lower leverage you are using more of your own money to cover the trade, so your size has to shrink if you stay at 2%, which means a smaller per pip value, which means you make less per pip.
Without leverage it is very hard to make money on small trading accounts. The only traders that would be able to make decent money on 1:1 / no leverage would be institutional traders/banks/traders who started with million dollar + accounts.