Leverage in general terms simply means borrowed funds. Leverage is widely used not just in Forex trading but also to acquire physical assets like real estate or cars.
Forex trading by retail investors has grown in recent years, thanks to online trading platforms giving everyone the ability to trade from their bedrooms. The use of leverage in trading is often likened to a double-edged sword, since it gives the ability to make substantial gains but also, substantial losses. It’s considered that high degrees of leverage in Forex trading is the norm.
One of the reasons so many people are attracted to trading Forex compared to other markets is that with Forex, you can usually get much higher leverage than you would elsewhere.
The problem with this is that many retail traders only have access to
a small amount of funds, and therefore think that they can only make
money quickly through the use of leverage, without thinking about the
consequences of what will happen if they lose.
Many traders who use leverage blow up there accounts within the first year because they are either emotionally prepared to sustain heavy drawdown, or they simply lose all their money due to a margin call.
Many people think trading is a way to get rich quickly, however they will quickly find out that’s not the case.
Here’s an example of trading without leverage:
If you have $10,000 in your account, you should be using a lot size of 0.10 lots, this means if you buy USDJPY at 0.10 lots you are buying 10,000 units of the base currency, which would mean 100 pips would equal 1% of your account balance, $100.
Trading this way will allow you to make better trading decisions and keep yourself from falling into psychological traps like fear and greed. This in itself will dramatically improve your trading results by allowing you to think clearly.
If you can consistently make 500 pips per month, you would be
compounding your account by 60% per year, which is an amazing return.