Well, I am ready to talk about a biggie, the margin. What is margin? A margin is money we put up as collateral to our broker to cover credit risk on the money the broker has lent to us. A margin gives you leverage (magnification). Leverage is an amount of money a broker lends an investor to buy securities, in our case currency.
The thing that makes margins/leverage so attractive is that it can increase your potential returns). In a 50:1 ratio, for every $1.00 you invest your broker is extending $50.00 to increase your buying power. In a 100:1, it is $100.00 for every $1:00 you put up, and so on. Whoo Hoo! Nice broker, huh??????? The thing about leverage is it can either work for or against you. For most traders, it works against them, that is why your broker is willing to give it so freely. The expectation is it will help you deplete your account more quickly.
Forex is a zero sum game, for every penny you lose, someone else gains it, and it is usually the one who has the deepest pockets and can most afford to ride the volatility waves; so brokers can afford to allow you to over leverage because they have much deeper pockets and usually they win.
I have to mention this, there are some brokers that offer up to 750:1 ratios, stay away from them. I would not trade with a broker who offered more than a 400:1 ratio and believe me 400:1 is gamblers stakes. You work too hard for your money to willing give it over to the market.
How do you protect yourself against the downside of leverage???????
Decrease the size of your leverage. It will take away from that ideal wind fall, but it will also keep your account from being depleted fast.
If you are new to Forex, my advice is a 25:1 or 50:1 ratio, and decrease your lot size. Most of us don't start our accounts with $50,000, and if you are fortunate enough to, then you definitely don't want to give it to the market.
Remember leverage ONLY works for you if the market is moving in your favor. If it moves against you, then it magnifies your losses.
This blog is not in anyway an enticement or solicitation to trade in the Forex Market. These tips are for informational purposes only and are not to be substituted for legal advice or council. I have written this blog in hopes that it will help you to avoid some of the terrifying pitfalls I had in the Forex Market before I learned better.