Leverage: Blessing or a Burden

Leverage allows any trader to control large amounts of capital; it is every trader’s best friend and worst enemy. We all realize that investing involves risk, and no one makes money without some degree of risk. That being said excess risk has another name: margin call. This isn’t the CME were your broker gives you a courteous call saying “pay up sucker,” no this is online currency trading. Or maybe you’re so confident in your trades that you never lose. Probably not if you’re like the rest of us then listen up, anything over 8:1 leverage is not smart. Some term it irrational exuberance, froth, or undue risk I call it stupidity. Moral of the story is, don’t swing for the fences. Chances are you’re a new trader and you have this wow I can control 1 contract with one thousand dollars feeling. Let me tell you there is only one George Soros, and you’re not him. Listen kimosabe go 100:1 and odds are tomorrow you will be margin called and have to explain to your self how you lost $1,000 in less than an hour. What’s worse you’ll stop trading leaving all the profits to the gnomes of Zurich.

Here are some rules to live by the first rule is 100:1 is a sucker bet don’t do it. The second when you start on margin know Wall Street almost never goes above 8:1. Be humble because the currency market is a 24 hour market so you’re competing with the legendary gnomes of Zurich, the PRC, and hedges funds on Wall Street. While something may seem obvious to you, there is probably a counter argument developed by someone with a lot more money to allocate and therefore leverage than you. We can’t forget what Keynes said regarding the market, “The market can stay irrational longer than you can stay solvent.” Do your self a favor stay solvent long enough to gain market experience because once you’ve become hooked it’s better than heroin and you have a good chance of making money too. The best way to stay solvent long enough to enjoy the market is let me hear you yell, “…..” you should know but if you’re the slow type it’s supposed to be, don’t over leverage.