Leverage, in addition to increasing your losses, has another way of killing you.
However, it is a far slower death, similar to dying by a thousand cuts.
Most forex traders don’t see it coming, and by the time they do, it’s too late.
This killer is the transaction costs associated with using high leverage.
Leverage not only magnifies your losses, but it also magnifies your transaction fees as a proportion of your account.
Assume you start a $500 micro account.
You purchase five micro $10,000 lots of GBP/USD with a 5 pip spread. Your true leverage is one hundred to one ($50,000 total mini lots / $500 account).
However, consider this: you spent $25 in transaction expenses (($1/pip x 5 pip spread) x 5 lots).
That is 5% of your total account balance!
You’re already down 5% with just one trade and the market isn’t even moving! If you lose a trade, your account balance will decrease.
Your leverage grows as your account balance decreases.
The more your leverage, the faster your transaction fees deplete the little money you have left.
This is the type of slow and silent murderer I’m referring to.
The greater your leverage, the greater your transaction cost as a proportion of trading capital.
As a result, transaction charges are one of the six most critical aspects to consider when selecting a broker.
Consider how the relative worth of your transaction expenses increases with higher leverage if you go long 10,000 units of EUR?USD with a 5-pip spread, which represents $5 transaction cost.
You’ve seen how leverage can increase not only your earnings and losses, but also your transaction expenses.
Margin does not equal leverage.
Leverage is the number of times your entire account is leveraged.
The greatest amount you can lever is determined by your margin need.