A proper understanding of leverage is essential to your survival as a forex trader. Leverage is a wonderful thing, but it cuts both ways. You can make big money quickly and lose big money quickly.
Our goal is to have a positive return monthly, so that we can be independent. Archimedes, the Greek philosopher and mathematician said:
'Give me a place to stand and I will move the earth.'
On the lever in Pappus Synagoge
A Lever allows you to exert great strength on one side with a seemingly little effort from the other side.
When you trade forex, you are using very little money from your pocket to control thousands of dollars in the market.
If you win, you win big, often making 100% on your money and if you lose, you stand to lose a big chunk, if not all of your account.
So here is how I use leverage. Use a small amount of the leverage available to you when you trade. Just because it is there to use does not mean you should use it all.
Recently, I sent this email to one of my customers seeking advice on making the system work. I think it applies to everyone.
Let's look at two scenarios of a guy with a trading account of just $500.
Trader A buys 3 mini- contracts of the pound @ 1.9000 with a margin of $150 Trader B buys 3 micro lots at .25 costing him $37.50 in Margin.
Price moves against them both for 100 pips.
Trader Trader A is in the hole for $300
Trader B is in the hole for $75
Trader A is in serious panic because he is $200 from blowing up his account.
Trader B still has $425 left and can afford to hold on.
Price then moves down a further 50 pips.
Trader A loses an additional $150.
Trader B loses just $37.50.
By now, Trader A has blown up his account and trader B still has $387.50 left in his account even though the market has moved down 150 points from his entry.
I'd rather be Trader B. If Trader A were wise, he would have used a stop loss. His account would still be down even if he had lost $150.
Trader B can ride this out because by now the market is ready to reverse big time.
So watch leverage and how you use it.
When you enter a trade on metatrader4, it shows you your margin level. I never let my margin level go below 1500%.Here is what you should look for:
In this example, you can see that there is a balance of about $600 in the account. There were two trades on of .25 each and a resultant margin level of 2537%.
Whatever the market does here, this trade will make at least $30. If you do the calculation, that's about 5% return on this trade alone. Do 10 of these and you have returned 50% on $600 within the month.
You can really grow rich steadily.
Please pay attention to what your margin level says. Try to keep it at 1500% or more.
This is how I turned leverage on its head and how I am able to get away without using a stop loss.
When trades go against me for a day or two, my account is never in danger because I can ride it out and reap the benefits later when it does go my way which doesn't take long because I enter at very good prices.
best-
Olumuyiwa
