Leverage is one of the most attractive and dangerous elements of trading Forex. Most Forex Brokers offer leverage of up to 1:500. Many traders understand the way that leverage can Maximize their returns but do not understand the negative aspects of leverage and how much it can cost. when Using excessive leverage the trader leaves themselves open to massive draw downs on even small market down turns. As we outlined in previous entries Many traders struggle with entry and exit points. When using excessive leverage the importance of setting appropriate entry and exit points becomes amplified.
Many Meta Trader 4 Brokers have a margin call setting of 100% which means when your equity equals your used margin all of your trades will be closed out. As a trader it is never a good idea to trade around these levels. that being said when trading with excessive leverage if your account reaches this margin call level the actual money left in your account will be minimal.
Many Forex Traders have a very skewed perception on the reality of leverage. Leverage can be a double edged sword in every sense of the phrase. This Blogger would advise the use of caution around any system that claims to require 1:400 or 1:500 leverage in order to succeed. If a system requires this type of leverage it generally means that it will float big losses while realizing small profits.
It is best to test the leverage that you use in a Forex Practice account.