Real Concept of Levarage in Forex Trading

when people talk about leverage in Forex they focus in on its unique selling point, which is that it allows a trader to control large trading volumes with only a small investment. 

Forex brokers are especially eager to tell you in Trading Tips about how much leverage they will give you just to get you to open an account with them. A typical broker will often demonstrate the ability to leverage your account with them at a hundred to one. 

This means that you can trade 100 times what you deposit. For every 1 dollar you have in your account you can trade $100, so if you have $1000 you could place a trade worth $100,000. 

So, where is the dishonesty? 

Well, the twist is that brokers are not usually up-front about the risk involved when using leverage in Forex, and just how easily you can lose your $1000 when using this amount of leverage. 

If you use the leverage of a hundred to one in a trade worth $100,000, you only need to put forward $1000 and your broker will in effect 'loan' you the other $99,000 needed to cover your trade. In order to make such a large trade, you have to put forward a percentage of it as security, or as leverage. 

In Forex trading we all know how complex the market can be, and a trade will often move against you before turning well and going into profit. If your trade moved against you by just 1% it would flush out the $1000 you put forward yourself. 

Now your broker will not be prepared himself to lose money on your gamble and will act to defend himself from losing on your trade. As soon as your 1% of the trade is vanished out he will close your trade for you. This is called a 'Margin Call', and is mandatory for your broker to ensure they don't actually put their own money at risk. 

Now the trade you placed might have been a good one which turned around and moved into a profitable position. It's not good you won't make money on it though because your trade got canceled when it made a trivial movement against you first. 

You just lost $1000 in the space of a few seconds because you were too much leveraged! 

So, what have we learned? 

The important lesson here is that when you going to use the principles of leverage in Forex Trading, do not allow your account to become too heavily leveraged. You may as well flush your money down the toilet as place it on a trade where you have no room to move.