High Leverage Risk in Forex Trading

High Leverage Risk in Forex Trading – Did you know that leverage is very dangerous? Check out the full discussion of the risk of high leverage in the following article.

The concept of leverage is indeed very profitable in forex trading, but it can also be dangerous if you are not careful in using it, especially if you use very high leverage (over-leverage). High leverage will cause the minimum margin or minimum guarantee to be paid each time the transaction decreases. Consciously or not, the risk of leverage often strikes beginners who aspire to get rich quickly from trading.

High Leverage Risk in Forex

High leverage is basically profitable because the minimum margin you pay for each transaction is getting less and less. For example, if you want to open a 1 lot position on the EUR/USD pair with leverage of 1:1000. You only need a Margin of 100 USD. Interesting right?

Well, this is forex trading with all the conveniences and current supporting technology. Many forex brokers provide facilities such as a very small minimum deposit coupled with high leverage. This is of course very interesting for beginners with small capital. With a capital of 10 USD and leverage of 1:1000, they can already trade forex with large sizes. Even today, there are brokers that provide leverage up to 1:3000.

Leverage Risk Associated With Trading Emotions

High leverage is indeed tempting, but it can also plunge traders because it has a bad impact on trading emotions. By using leverage that is too high, novice traders easily underestimate the risk because they “feel” supported by large capital to open many positions. In fact, the greater the Volume and the more trading positions, the higher the risk of loss that is borne. This is what is known as high leverage risk.

Psychologically, the higher the leverage, the more daring you will be in opening trading positions. This is because the minimum Margin value that you borrow from the broker is getting smaller. If you look at the table below, with only 10,000 USD of capital, you can already trade hundreds or even thousands of lots. Amazing isn’t it? That’s the power of leverage.

High Leverage Risk

Other High Leverage Risk

Another high leverage risk is when you are hit by a Margin Call. Margin Call is a warning system from the broker that appears when the equity balance is equal to the used Margin. Then what does high leverage have to do with the Margin used?

Let’s show how it’s calculated. In this example, we will use the example of a trader who does not place a Stop Loss and only uses a Margin Call as a safeguard. This trader uses a broker whose Margin Call and Stop Out levels are 100%. An example will be taken from the case of Budi and Ani earlier.

Budi with a capital of 3,000 USD and a leverage of 1:500 requires a Margin of 200 USD to open a position of 1 lot on the EUR/USD pair. If Budi experiences a Stop Out, all positions will be closed when the equity value is equal to the used Margin. Because Budi uses 200 USD Margin, Budi’s position will be closed when Budi’s account only has 200 USD remaining.

Having the same amount of capital as Budi, Ani chose to use a leverage of 1:3000. Ani does not know the risk of high leverage, she trades by opening a 1 lot position on the EUR/USD pair. To open this position, Ani only needs a margin of 33 USD. However, because he is still a beginner, the analysis is reversed. Since the selected broker sets the Stop Out level at 100%, all of Ani’s positions will be closed when there is only 33 USD in her account.

Now, it’s all up to you, do you want to be Ani who chooses the highest leverage, or become Budi?

Closing

After the long discussion above about the risk of high leverage forex, still, intend to use high leverage at this time? It’s fine if you say no. High leverage is just a practical answer in gaining more profit in the forex market. If you want to make a profit in trading, learn things like risk management, good use of money management, etc.

Source Reference: https://www.seputarforex.com/artikel/resiko-leverage-tinggi-dalam-trading-forex-138022-31

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