Forex Myth Buster: Leverage is Dangerous

I have been very busy the last few months and as you can tell I have only been able to get one post per month out, but I tried to make it worth it. We are one trading day away from the mid-point of November trading action and I have comfortably reaped over 2,000 pips so far. Yes, it has been a good month which partially explains my absence. I was busy living life and enjoying the benefits a rogue forex trader is able to afford.

As stated above, I may only have had time for one post per month but it was one which knocked you off your feet as I read a healthy dose of unpopular reality about forex trading. During last month’s forex myth buster section I informed the newbies who try to dabble around in the largest and most liquid financial market of world about forex demo accounts. In case you have not had a chance to check it out I strongly recommend that post to you which you can access here: Forex Myth Buster: Forex Demo Accounts.

Today I will bust yet another myth which often circulates in newbie circles as well as equally less educated offices of regulators; leverage is dangerous. Those pathetic morons who claim that leverage is dangerous and will lead to blown accounts are equally dumb and uneducated as those who think you can learn how to trade in a forex demo account.

This myth has not only infested newbie traders circles, but also the highest echelon of regulators who blame the collapse of Lehman Brothers and Bear Sterns on over-leveraged trading accounts which is not only a display of utter ignorance and lack of comprehension about leverage and the financial system in general, but it also makes for a good joke around smart money institutions.

The amount of leverage simply does not matter; the lack of risk management causes traders to blow their accounts like a prostitute who sucks you dry for the right price. The two primary reasons why Lehman Brothers and Bear Stern collapsed are simple: 1. They were dumb money financial firms who thought they should try to manage hedge funds; 2. They did not follow proper risk management and where trading based on hope like a teenager with a few thousand dollars in his pocket hoping to get some.

Leverage may be the greatest tool given to traders, but you need to understand leverage in order to use it
otherwise the tool will use you and become your master while you become the tool. Alright, I sense that most of you are still struggling with this concept so let me slap you with a numeric example the same way I slapped something else in your girlfriends face which she enjoyed and begged for over and over again while you spend your free time figuring out why you have failed at life:

Most newbie traders have picked up the idea that 1% to 2% risk per trade is how professional traders operate their accounts so I will use that example (whether it is correct or not is for another post).  I will also give you a familiar trading portfolio size as most new traders operate an account with insufficient capital; anyway so here you are thinking you are something with a trading account of $1,000.

Common sense will allow even the most moronic trader to calculate that 2% out of $1,000 is a whopping $20. This means you will risk no more than $20 on your trade. Stay with me for a few more moments; your leverage is 1:10 and you will only risk $20. Now you increase your leverage to 1:100 and guess what? You are still only risking $20. Take it another step further and trade with a leverage of 1:1000 and you are still only risking $20.

Did you get my point here?

Don’t worry; if this was too much for you to comprehend then you are definitely in the wrong place.

Forex myth busted!

PS: The hotties in the above picture are Mariah Milano and Jessica James.