Leverage risk

Using high leverage on a steady trending market shouldn't be a bad idea however, during times when liquidity is rough, prices tend to move very violently. Whipsaws are common where prices would move 200 pips to whichever direction within a matter of minutes and reverses with more or the same number of basis points. A 200 pip movement down trading a mini account with a single lot would have had just cost 2% out of a $10,000 trading capital without leverage for a total loss of $200. However when leverage is used on a $10,000 account trading 10 lots on a mini account, that 200 pip movement would cost 20% damage to the capital for a total loss of $2,000. If that amount of loss is too much for you to bear then don't even consider trading a higher lot.

Making big money in Forex is possible using high leverage, but if that same  amount of target profit doesn't look good on the risk side then you can't afford that gain. For instance, if you can stomach a $200 loss then a $500 profit should be within range considering that there is always a possibility that prices would reverse. The psychology behind this is the risk capital. Risk capital is the amount of money you can lose without affecting your lifestyle. 
If a $2,000 loss doesn't really affect you to target a $5,000 gain, that is because you have more money to spare say, $100,000 and that capital is outside your daily and future living expenses. But having only $10,000 capital aspiring a $5,000 gain within a narrow price range is insane because the risk involved is too much.

Stocks | Forex | Options | Economics | Bonds | History | Language learning | Technology | Technical Analysis | Fundamental Analysis
Copyright © 2014 econtrader | Risk disclosure | Terms of Use