Leverage, double-edged sword! Which one to use?
I hope that you’re aware that this is the most important issue when you decide to trade forex long term or when you already trade and lose the money quickly! Why?
Bigger leverage is, bigger risk is and it’s easier to lose or to ‘burn’ your entire account. If you have laverage of 1:500 or more, you can easily lose your entire account with only one or two trades! How? If you have too big leverage on you’re account, you have the ability to go out in the market with large orders, regardless of what you don’t have a large capital. With the desire for maximum profit, you can easily make a huge loss in such a way, from which you can not return. Be aware that, is’t not normal to make a $2,000 trade with $1,000 capital! Is it possible? Yes it is, but you must take a too big risk for such a trade and you must risk your entire capital or at least 50% of it. That’s not normal and if you manage to do one great trade, the next one could be devastating.
I tried everything in my trading career and based on my experience, I recommend you to open an account with a smaller leverage as you can. I suggest that you trade with leverage such as 1:10 or with 1:25 max. In this case, you’re account will not be in huge risk and it will last longer. Here is the example of the Forex Leverages, purchase power and 1% price change with 1,000 usd invested capital.
On this example you can see why the leverage is double-edged sword. As I already wrote, big leverage offers you the ability to go out in the market with large orders, regardless of what you don’t have a large capital and only slight move in the market can erase you’re entire investment. I am sure that most of the traders have tried this and felt the heat of the big leverage. We have a fancy term for that, it called ‘burned account’! That’s why think carefully when you choose you’re leverage and from me ones again, choose the small one, 1:10 or 1:25 the most! Here is how the traders around the world use the leverages in average.