Are you participating in currency trading to get rich? Are you surprised by the leverage in currency trading?
Your trader can offer you anything from 200:1 to 400:1 leverage for currency trading.
What does that mean?
If the trader offers you 200:1 leverage for currency trading, that means you can put down $100 into the forex trading account, and use $20000 for currency trading.
$100 is your money, the rest of the money comes from the trader. That means he is willing to lend you money at the rate of $200 to every dollar that you put into the forex account.
If the leverage is400:1, that means you can use $40000 for currency trading as long as you put up $100 into the forex trading account.
While that sounds great, you must consider the risks and rewards of leverage in currency trading.
Why does your trader want to lend you so much money?
The reason is that he gets commission from your currency trading. It does not matter whether you make money or lose money in currency trading, he will get commission on every transaction.
What are the risks of leverage in currency trading?
If the $40000 account becomes $30000, you need to repay the money to the trader.
Can you imagine using only $100, and lose $10000? That is due to the fact that you use leverage.
You are using the money of others.
If you use your own money, there is no way you can lose $10000 with $100. The maximum loss is all your capital, which is the $100 you put into forex trading account.
The problem with leverage in currency trading is that you can potentially lose all the $40000.
The risk of leverage in currency trading is your attitude. You will feel as if you are very rich. You will feel as if currency trading is just a computer game.
You will not even feel the pain when yousee the $40000 account becomes $30000. The reality that you owe the trader $10000 does not set in. You will think that you can recoup the loss after a few more transactions.
That is why a high leverage encourages excessive risk taking. You definitely do not dare to take the same risk if you are using $40000 of your money.
However, the high leverage in currency trading can bring rewards.
What are the rewards of leverage in currency trading?
The fact that you can use $40000 for every $100 that you put into the forex trading account does not mean you need to do so.
You can use $20000 instead of $40000 for currency trading. If you lose money in the transaction, you are not making big loss. If you see an opportunity to make money, you have a balance of $20000 for trading.
The rule of thumb is always to use money that you can afford to lose. If you can repay the money should you lose all the $40000, you can trade with confidence.
A high leverage also means that you can earn a few thousand dollars with $100.
If a single trade generates $10000 profit, that means you are making $10000 with $100 capital. You cannot find any other form of investment that makes so much money in such a short time.
That is why the best traders can retire young and rich.
Scheng1 is a passionate blogger from Singapore. Rich in every sense reveals my deep desire in enjoying life, and be rich in every possible ways.