Singapore Forex Courses

Leverage is often being blamed by Novice Forex traders for losing money. It is being blamed so often that and they did not take a strategic moment to think what could be the problem really is.

For those who has no idea what is Leverage means in Forex trading. It is the amount of currency a trader can control relative to the amount of equity that trader possess in his or her trading account. Too complicated?

Let’s use an example:

Forex Brokers offer traders leverage 100:1. For each $1 the traders put in the broker account, they can control $100 to trade with. This amplify your profits and your loss, allowing anyone to trade with very little amount of money but reaping profits as if they possess large amount of cash.

Of course, when market go against the trader, the leverage will amplify the loss as if he or she possess that large amount of cash. The worst case situation will be the trader’s account will be wiped out.

Since leverage is able to cause us to loss so much money, even though we can make so much money from it. Why not reduce the leverage or demolish this function?

Let’s have another example and to ponder upon:

A trader has $10000 in his account. He trade with a $10000 lot size.

His maximum leverage is 10:1. The highest number of mini lots will be 6 if the trader want to buy GBP/USD.

Each pip would be worth $6 if they traded the maximum amount of GBP/USD.

The trader’s strategy is to have a risk allowance to 3% per trade. In this case, he is willing to risk $300 out of the $10000 on this trade. This also mean they wouldn’t able to risk their max amount unless the trade called for it’s stop to be at least 50 pips from the entry price.

$300 out of $10000? Big deal right? However, consider that the trader in the above example has already maxed out his equity. He isn’t able to enter another position until the current trade is closed. There are also a lot of other traders out there (including me) that has narrower stop loss than 50 pips in our strategy. If leverage is demolish entirely, the trader in the above example will have to distance of 500 pips from his entry price to stop loss to able to max out his 3% risk. This kills a lot of strategies.

It is easy to see that leverage is important as most strategies are using it to trade in the currency exchange. Trading will be very tough as there is no leverage to maximize all your trading opportunity. However, I don’t mean that you should get 1000:1 leverage and take as many lots position in your bank account. It isn’t strategically sound. In fact, it is suicidal!

But what is the true problem? The core issue for traders to become unprofitable? It is poor money management.

High leverage only reduce the amount of capital need to open a position. Trading with 100:1 leverage and 1000:1 leverage should not be any difference if you risk the same amount. The difference between 100:1 and 1000:1 is the amount of capital needed. 1000:1 isn’t riskier than 100:1 if you use proper money management.

Money management simply means that you should plan your entry and exit before making any trade. Only after establish the take profit and stop loss level, the trader then should set his lot size. The lot size should be adjusted so that the trader is able to risk the same amount of cash every trade.

If a forex trader plan his traders, risking the same small amount every time. Even with high leverage has no negative effect. But if we use very low or no leverage at all, it will limit everyone’s trading potential of success because most of the traders might not have enough cash to enter a position at all.

Leverage is not your enemy, nor is it your friend. It is a tool, like a double edge sword. Abuse it, it will cut you. Practice, learn from an experience teacher and you will wield this sword like a master. Learning, planning, strategize, and become a forex kung fu master.

I am sure for everybody, it is important to realize that in the Currency trading Market, there are many standards and ordinances. And some of them may differ another totally. Even so, this is the only market that running twenty four hours daily, 5 days weekly and most of the days in a year (sorry, I am too lazy to count how many days…) Thanks to that, many elements affect foreign exchange rate and many different forex strategies are needed to earn income.

So, does it matters how much those huge banks trade in the forex market?

Yes it does. The currency trading market is split into several grades of access. At the acme, 50% to 54% of all transactions in Forex market, are given to commercial banks and securities dealers. They possessed the best spread in the market. The reason why they are given this privilege is because they are trading extremely huge amounts of transactions, and each transaction can be a huge sum too.

Commercial companies and centrals banks enjoyed the next best privileges.

Commercial companies has a lasting impact in the long run compared to a short term effect. They may trade daily, but the amount is smaller compared to commercial banks and securities dealers. Even so, they still can impact the market. We should be also mindful of big commercial companies.

Central banks, they possess an advantage others doesn’t have. They have good flow of currency, thanks to their main role, it is extremely rare and hard for them to go bankrupt in the short term. Even so, they don’t trade as often as most currency traders. Their objective in trading is assure that money supply and Fx market is stable.

So, to answer the question “how much do the banks trade?”, if the daily trading volume is USD$4 trillion. Then Commercial banks and securities dealers are trading almost USD$2 trillion daily. With such good bid/ask spread, it wouldn’t be a surprise if they earning millions of dollars from Forex monthly.