Trading on Leverage
When a trader trades on leverage, he or she is effectively borrowing money from his/her broker.
The funds in the trader’s account serves as the collateral for the debt. This is why the broker will not allow the account balance to fall below the minimum margin: the broker needs to make sure that they can be paid.
Whenever a trader has one or more open trades, the broker is continually calculated the unrealized value of the trader’s position, in order to determine his or her net asset value (NAV).
If the trader’s account ends up dipping below the minimum level, the broker will issue a margin call: this can be anything from a request to add more funds to the account, the broker may choose to close the trader’s open positions at the current market price, or the trader may lose the entirety of the account and even owe money.
So is using leverage good or bad? It is a question that many forex traders have asked, and many say that it is a double edged sword.
It can give a trader a huge bump, or it can drag a trader into deep debt.
Ultimately, the trader needs to be smart about what is being traded, and at what ratio the leverage is at.
A 100:1 ratio is going to pay out big, but the risk is incredibly large as well: a 20:1 ratio is much more manageable.
The basics apply: don’t over trade, don’t open large trades, be patient and confident, using well planned trading strategies.