See how leverage may wipe your account clean in a hurry


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See how leverage may wipe your account clean in a hurry

  Now we'll take a closer look at “leverage” and demonstrate how it routinely wipes out naïve or overconfident traders.

  Allow the image below to haunt you about the bad consequences of using too much leverage and running out of margin before we begin.

  We've all seen or heard advertisements for online forex brokers claiming to give 200:1 or 400:1 leverage.

  We just want to be clear that they're referring to the maximum leverage you can use to trade.

  Remember that the leverage ratio is determined by the broker's margin requirements. If a 1% margin is necessary, for example, you have 100:1 leverage.

  There is the greatest amount of leverage. Then there's the matter of your genuine leverage.

  Leverage that works

  True leverage is calculated by dividing the “whole worth” of your position (also known as “notional value”) by the amount of money put in your trading account.

  Let's have a look at an example:

  You make a $10,000 deposit into your trading account. At a rate of $1.0000, you purchase one normal 100K of EUR/USD. Your position is worth $100,000, and your account balance is $10,000.

  The true leverage is ten to one ($100,000 / $10,000).

  “Effective leverage” is another term for “true leverage.”

  Let's imagine you pay the same price for another ordinary lot of EUR/USD. Your position is now valued at $200,000, but your account balance is still $10,000.

  Your true leverage has now increased to 20:1 ($200,000 / $10,000).

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