We have seen in our previous posts that there are many dangers awaiting those traders who use high leverage when trading this volatile and unpredictable market.

Let’s now have a look at the other side of the coin…

If leverage is dangerous, then using a very small one - or none - should protect a trader against any danger resulting from trading large positions, right? WRONG!

This confusion is caused by a misunderstanding of the word ‘leverage’, which can have at least two different meanings.

First, leverage has a purely technical meaning and refers to the instrument offered by a broker in order to boost a trader’s power to make profit (or suffer losses). Broker X can offer a 50:1 maximum leverage for trading on its platform, while broker Y may offer a 400:1 maximum leverage.

When we are talking about leverage in its technical aspect, there is nothing wrong with using the highest leverage allowed by the broker. It is not the use of this instrument per se that places us in a risky situation, and in what follows we will explain why. (more…)

The first aspect of our leverage myth refers to the belief that a high leverage can work in favor of the trader, and even compensate for losses in periods when trading does not give the expected results.

A trader that is aware of what leverage can do for him may tend to increase the size of his trades as losses accumulate, hoping for a recovery in the very last moment. This approach can only work against the trader, and usually leads to margin calls and huge losses in trading accounts.

Whenever a trader tries to apply a casino player mentality to trading (on purpose or not), the probability of his success is in fact much lower than if he were gambling in a casino with a 50%/50% chance. (more…)

The first thing a rookie learns about leverage is: a trader cannot do without it.

It is a sort of necessary evil, a big bad wolf that keeps showing up…. The higher you set your leverage, the higher your risk - but still, unless you use it, you cannot make good profit. Tricky…

Even if everyone is talking about leverage and almost everyone believes to have understood how it works, there are still so many misconceptions about this concept that cause traders to lose money.

We will start by analyzing together two of the most common misconceptions about leverage, and point out how a half-truth can turn into a big fat lie, when our emotions and greed decide to take over. (more…)