Skip to main content

Leverage and Margin In Forex Trading


The higher the leverage you use, the harder it's going to be for you to make money. The more leverage you use the more value each pip has. Since the pips are worth more, you have to risk fewer pips per trade to avoid risking your account's wellbeing.

Here's the problem. When you risk fewer pips, you'll get stop too close to the market's current price. Then any market "hiccup" will take you out with a loss. If you had lower leverage, you would have had more room for the trade, and it may have very likely become a winner.

Many new forex traders are trying to trade with these really tight stops (10 to 15 pips). That's way too close. Decrease your leverage and give your trades some room to breathe. You'll probably find that you have more winning trades.

Another reason why you shouldn't trade with tight stops is that it becomes a known target for Forex Brokers and will be triggered if possible to take your money however small your trade. There is ample evidence that this practice occurs and is also applied to Take Profit orders.

According to Dirk Du Toit, acclaimed forex mentor and author of Bird Watching In Lion Country, there isn't one wiped out trading account that wasn't leveraged too high. He also believes that there is no evidence of any sustained profitable trading that is based on high leveraged, short-stop trading.

The meaning of margin in forex is the amount of collateral the trader deposits with the broker when borrowing from the broker to trade currencies. Most forex brokers use the terms "leverage" and "margin" in a loose and interchangeable fashion and this causes confusion amongst traders. Most likely this is done on purpose: - the brokers want newbie traders in particular to see "leverage" as an opportunity not as something which is very destructive and dangerous if abused.

Popular posts from this blog

Forex Trading Psychology -vs- Forex Trading Method

Did you ever see the movie The Italian Job, and if so do you remember when John Bridger asked: “You see those pillars over there, that’s where they used to string up thieves who felt fine.” Make the transition from paper trading to real money trading and you will feel FINE too – Freaked-out Insecure Neurotic and Emotional. And what a great analogy ‘string up’ is, because after all those months of paper trading winners are replaced with real money losses, that is exactly what you will feel like doing to yourself. The Trading Psychology Viewpoint No discussion about trading, or the consideration to begin trading, can be done without a harsh realization - the vast majority of all traders lose. It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Forex Trading is much more of a psychological problem then a methodologica...

Extreme TMA System

The market, like a pendulum, is a never ending sequence of extremes. It forever tries to reach the mean but never succeeds, constantly overshooting it´s mark, reversing and trying it again but always failing to reach balance. This system attempts to capture those extremes. It is a compendium of my understanding of the market, brought to it´s simplest expression. The principles are not complicated. The first indicator, the TMA shows us the average of the path that the price action in the market is following. As such, it is a backward looking indicator and attempts to determine the future from the recent history. It corrects itself by repainting itself. It has two outer bands that show us the outer boundaries of price movement that we are searching for. Our second indicator, the TMA Slope indicator will show us the relative change in the slope of TMA as compared to previous candles. It determines in which direction a trade must be placed and also shows divergences to price. For examp...

What's more important: Trading Method or Trading Psychology?

Ancient argument: What's determines success in trading: A successful methodology  Psychology and discipline?  Answer: BOTH! But this is not a "chicken or egg" dilemma. Clearly in this case method comes before mind. I don't care how much self-discipline you have. If you don't have a viable trading methodology, then you will lose money. So method is more important. Well, maybe "more important" isn't the right phrase to use. But it definitely comes first. The reason I say it may not be more important is because there are many valid trading methodologies available. Yet ironically, traders keep jumping from one method to another ... one indicator after another  one book after another  one mentor after another  one seminar after another  This is the infamous "search for the Holy Grail." Sorry ... doesn't exist. Like most things in life, people keep looking for the answer outside of themselves, w...