Will I Go Into Debt if I Use Forex Leverage And Make a Poor Trade?

Posted on Posted in Beginners

Wow, never seen a question with so many confused answers like this. Leverage is never an easy topic 🙂

I give you a short answer and then I explain why. The short answer is:

NO! If you use common sense and you trade with a good and honest broker.

Let’s follow your example and say that you want to buy EUR/USD, investing $100, with a leverage of 1000:1 and a final investment of $100,000. Each pip will have a value of $10.
While there is no limit for your profit, there is a limit of $100 for your loss, that means that if you are losing 10 pips (or, if you want, 100 dollars) on that position, the broker will close your position and you will have $0 in your account.
To be more accurate, many brokers use the so called “margin call” to close your losing position and protect your account. With the margin call, the broker closes your losing position when this is consuming a huge part of your account.
I suggest to my student to start trading with OANDA, there is a tool that you can use on OANDA to calculate the margin call: FX Margin Call | Forex Margin Call Calculator | OANDA
Anyway you will have a margin call when you are losing around the 80% of your account with the trades that are still open on the market, if you follow the advice (and the common sense) to not risk more than 2% with your trades, this scenario is nearly impossible to reach.

Another thing to consider is that if you have a good and honest broker, you simply can’t open that kind of position 🙂
Your broker will not allow you to invest everything in one trade, it is a bit the same logic of the margin call, they do it to protect your account from catastrophic financial decisions. You can usually invest up to 25% of your account in a single trade. In addition, a good and honest broker doesn’t give you a leverage of 1000:1.

Last thing, there are very rare occasions when the market is super volatile due to big and unexpected news (like the nuclear accident in Japan in 2011), in that case you can see the currency pair losing/gaining hundreds of pips in seconds. In those cases, the system can be a bit delayed to close your position at your stop loss or to give you a margin call, so you can lose more than you were expecting, but if you were trading with 2% of your account, you definitely can’t lose more than your initial investment, even in those situations. If you were trading 25% of your account or more… well, you would have been in BIG BIG trouble 🙂

Trading Forex market with real money, especially if you use a high leverage, can be dangerous and you will probably lose your money if you don’t have any prior knowledge and experience in Forex trading. I always suggest to start with a demo account, you can practice and become a better trader without risking your money.

I also launched a course about Forex trading, it starts from the very beginning and it will guide you through all the main concepts and tricks you should know before starting to trade. You can take the course for just $10 following this link: Forex Trading: Your Complete Guide to Get Started Like a Pro

Believe me that I’m saying the following without any self interest, I get $5 if you enroll through the link, it doesn’t change my life, but it can change yours.
Consider the course as your best investment. If you face Forex market without being prepared, you can lose a lot of money, much more than $10. Spending $10 now, can save you much more money in the future.

Good luck with your trading 😉

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