Leverage is a novel idea that has made the Forex market very attractive to individual traders, which is why so many of us are getting into the industry. Leverage in Forex trading can go as high as 1000:1, which means you can control 1000 times the value of a trade compared to the margin you put up. On its face, it sounds like a great offer, make a $100,000 worth trade with only $100! Until you consider the flipside.
What happens when you leverage trades?
In the above example, we have a trader with a $100 margin and $1,000 account balance controlling a $100,000 trade, which is a standard lot. Let’s assume they are selling the EUR/USD pair whose exchange rate is at 1.01125. In this trade, every pip movement in either direction would be worth about $10.
The EUR/USD has a high average daily range (ADR), so assuming a 50 pip movement, that could either be a $500 profit or loss. If the EUR/USD went up instead of down, our trader would lose $500 from his $1,000 account, essentially half their capital on one trade in less than a day. Sure, they could also make $500, but you can see the risk involved.
How is that similar to gambling?
One major difference between Forex trading and gambling at best online casinos is that a Forex trader’s ability to determine the amount of risk they are willing to take. If, say, your account has a balance of $1,000, you can decide not to lose more than $50 on every trade. When leverage is low, you can still do this while giving the trade room to develop, so that the price goes slightly against you and turns around in your favour.
In the example above, leverage of 50:1 and the same $100 margin would, the EUR/USD pair would have to go 100 pips against you before you were stopped out, which is unlikely if you did your due diligence.
Therefore, high leverage puts you in a position where you can either win or lose and very little breathing room. This is just the same as gambling because you can either win big or lose big, which makes trading with a high leverage a gamble. Even if you were actually right in the first place, most of your capital would be wiped out before your technical analysis of the markets proved right.
Another aspect that makes high leverage Forex trading similar to gambling comes in when you consider the odds of success. They say the house always wins because the odds of a player winning are very low, but this isn’t true. The casino’s odds in games like blackjack are only about 20% for unskilled players and even lower for skilled players. So, how does the casino win? By keeping you on the table betting big.
The idea is that as you win, you keep making bigger bets and one big loss takes away all the profits you made and your initial capital. Forex traders beat this by keeping losses low and maximizing their odds of winning. When you use a high leverage, you’re playing right into the casino’s strategy, such that even if you win a few times, one loss will be enough to wipe out your account. In this way, trading the Forex market with a high leverage is just the same as a gambler in a casino. This is why we recommend you to use the best way to trade Forex and do not gamble with high leverage.