So there is a thing called leverage...

Hi Guys and Girls.

If you open a trading account with £1000 of your own money, I guarantee you could get £200,000 to actually trade with.

Your face probably looks like this right now

You probably currently think I am either stupid, or one of those guys that send you an email from Nigeria claiming to be Dr. Scam-a-tunde with $400,000,000,000,000 I urgently need to transfer into your account, for which you will get to keep 15% for your troubles.

The truth is I'm not stupid, or a Nigerian scam artist (I'm actually Ghanaian). The statement I made at the start of this post is entirely true. It is called 'leverage' (not the TV show). Leverage is dangerous. It is also a good traders best friend. I'll explain how...

If you were to open an account with £1000 in it, a broker could offer you 100 times the amount in your account as leverage. This enables you to amplify your gains, but it also amplifies your losses (if you don't protect yourself).

If your broker offered you leverage of 100:1, this means that with $1000, you could open a 1 lot (1 lot = 100,000 units of currency) position USD:CHF (US Dollar:Swiss Franc). This would mean that rather than making just 10 cents per pip, you would be making 10 dollars per pip. (Recall what a pip is here).

This also however means that you can lose money a lot quicker. If the market moves 100 pips against you, your account would be wiped out. Considering the daily movement of USD:CHF is about 120-135 pips, this could happen very easily.  Rather than a 1 lot position, if the position was just 0.01 lots, 100 pips would only resulted in $10 being lost, just 1% of your account.

I've been taught that there two ways a trade can go. You can lose (small or big) or gain (small or big). By managing the size of the trade you open and setting a stop-loss, you only risk a small propotion of your account size when trading, effectively making the liklihood of a big loss very small, and allowing for small losses that don't hurt you emotionally and gains (small and big).

It's okay to lose as a trader, as long as you lose small. Understanding this is a fundamental characteristic of the successful trader.

Thanks for reading,

Jr

www.twitter.com/jr_dot