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Leverage is an essential part of investing. How many people buy a house outright? Not many right? A mortgage IS leverage. And savvy investors use leverage expertly to make their money work for them. Learning to use leverage is key to trading, and not just shelling out a wad of your hard-earned cash on a 50/50 deal where the payout is only 75%, and there are all sorts of other constraints in place to help you lose (as we have already discussed and will continue to discuss in future posts). So for now having given you a very basic introduction to leverage, and having informed you that it is not the evil binary options brokers are making it out to be, we can move on to the next myth. Once we are done with these main myths, then we can get really stuck into Forex and show you that not only is it nowhere near as complicated as binary brokers would like to make out, it is one of the best ways that a retail investor can, with some dedication and some smarts, take control of their financial destiny.
Next time we look at spreads. Binary brokers say NO SPREADS wherever you look, I’m afraid that this is not true either, and what’s worse their secret spreads are designed to help you lose, whereas Forex spreads are simply a commission you are being charged for a broker’s role as middleman between you and the market.
As far as losing more than you invested goes, all Forex brokers will automatically close your open positions when they eat away at your margin enough to put their own books at risk. Your margin is the amount you need to have in your trading account in order to guarantee a trade. I’ll go into all this in much greater detail in later posts, but for now, I just want to try to open your eyes a bit and let you know that all is not as it’s been sold to you. Forex brokers automatically close your open positions, starting with the most unprofitable when you reach a certain percent of your margin. First you get a margin call, which is basically a call to deposit more money into your account or close your positions, then when your margin drops even further they will start closing your positions for you. There is no way for you to end up owing more than you deposited, so if you always only have as much in your account as you’re willing to lose then you know what the deal is at all times and exactly what is at stake. Indeed if you are smart and have proper risk management as part of your trading strategy you can quickly make a great deal of money trading Forex with leverage.