If you are a forex trader considering one of these '400-1 leverage'
offers, you should first know:
1. The rules of the game you are about to play.
2. About leverage in Forex and how it works, not for you, but for the
broker.
Here is how it works:
Leverage can be beneficial but it can be your worst enemy. 400-1 means
that US$1000 can control a $400,000 position say against the Yen. This is
great but it also means that even a small move against your position can
wipe your account clean. This is obviously very bad news for you but great
news for the broker!
Why Is It Great News For Them?
Well, the first thing that traders must realise is that Forex firms make
their own markets - they make the bid-offer price to clients. They use the
assumption that as most highly leveraged speculators lose then it's good
business to take the opposite position to them.
This is done automatically, so when a client buys Dollars against the Yen,
the broker sells short the Dollar. When the client covers the position
(either for a profit or loss) the broker is taken out also. If the client
wins the broker loses and vice-versa. This is how the leverage game is
played.
So, who do you think usually wins in this game? No, not you. It.s the
broker. It.s a statistics game and the statistics say highly leveraged
speculators lose.
Ok then. If the brokers stand to gain when a client loses, what is the
best way to make sure that the clients lose Bigtime?
Easy, let them trade huge positions on a limited amount of capital so that
the odds even for the best and most talented traders are pretty much -
ZERO.
Why do you think that the ads of '400-1 leverage' are splashed all over
the brokers websites? They are selling you the supposed .benefit. when in
turn, the reality is that the only .benefit. is to them.
Conclusion:
If you want to play the leverage game in forex, understand how the game
works. The game basically works this way: The broker is the shark. The
retail trader is shark food. If you are serious in your quest to make
money currency trading . educate yourself on the risks involved.
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