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Experienced Traders Know That Small Leverage Is Preferable

There is a link between leverage and the effect it has on a forex trading account. The greater the amount of effective leverage used, the greater the fluctuating swings that occur in the account equity. For the most part, the leverage is 10 times the most effective amount for trading. Just because a trader has the right to access greater leverage on a trading account, it doesn’t mean that the trader has to use all the portion provided. As an analogy, think about a motorcycle or a car. Just because a car or motorcycle engine can run as fast as 200 km per hour, it doesn’t mean that drivers should always run the vehicle at full speed. Logically, the faster the vehicle runs, the greater the risk of an accident. From this, it is possible for the driver to suffer a greater injury at high speed. Leverage in forex is not much different from this analogy. The more leverage is used in a trade, the more risk is placed on the trading account. However, if you are an experienced trader and you are confident with your skills, you may go to to find brokers that provide high leverage.

When a trader uses too much leverage, a few losing trades are enough to scorch the amount of profit from winning trades. One easy example is if trader A buys 50 lots AUD / USD, while trader B buys 5 lots AUD / USD. The question is, what happens to the account equity of trader A and trader B if the AUD / USD price falls 100 pips on resistance? The answer is, both trader A and trader B suffer a loss of 50% on their respective equity accounts. This means that the size of the leverage has the same effect on losing. By using low leverage Trader B drastically reduces the loss ratio by 100 pips. For such reasons, it is worthwhile for traders to be a little conservative by using leverage no more than 10 times. If it is made in a comparison with ratio, then its ratio will be 1:10. The amount of leverage a trader is willing to take should be based on how much risk he is willing to take.

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