So, on to leverage. One of the selling points binary options brokers use to convince you their platforms are safer is that in Forex you are offered leverage, which can quickly wipe out your account balance, and in binary options trading there is no leverage at all so it’s safer. The main argument they use is easy enough to debunk so we’ll start there.
Leverage is essentially an interest free loan given to you by a Forex broker with which you can control an investment that is far larger than the capital you have to hand. So if you have deposited $5000 in your account with leverage of 500:1 you can control an investment worth $2,500,000. Sounds scary right? Well it’s not. Firstly 500:1 leverage is an enormous amount, it’s the highest that most Forex brokers are willing to offer and not many Forex traders ever go that high. But where binary brokers get sneaky is by suggesting that while leverage can massively increase your wins, it can also massively increase your losses beyond even the money you have in your account. In other words if you find yourself over-extended and a trade doesn’t go your way, in fact goes the opposite way BIG TIME, then you can end up owing your broker money on top of the initial $5000 you invested. This is NOT true. Yes, leverage increases your potential profits, and yes it increases your potential losses just as much, but you will never end up owing money to your broker. That’s just not how Forex works, and binary options brokers have been really good at manipulating the fact that Forex trading seems like this big impenetrable subject that most beginners don’t understand. That’s how they can get away with giving you a severely bum deal while making it seem like they’re doing something innovative and socially conscious. They’re not, trust me.
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.
Those rapid fire 60 second trades that binary options brokers are trying to sell you as some kind of revolution? The ones we debunked last time? The ones where not only do you have to correctly predict the rise or fall that is due to take place, but also slot that rise or fall neatly within a prepackaged window of time that they are offering you (be it 60 seconds, 5 minutes, 15 minutes or whatever)? Well trading Forex with leverage REALLY lets you get in there and profit quickly from small rises or drops in value, closing your trades whenever you want and then opening new ones when the asset you are monitoring goes the other way. You can’t scalp in binary options, in Forex you can, and if you get good at it and use leverage wisely you can earn a pretty penny in no time. Of course you can quickly lose that pretty penny too, don’t get me wrong, but that’s all part of the game. At least the way the Forex industry is going nowadays, all you have to worry about is your own proficiency as a trader, and whether you’ve got your trading psychology right, not your broker actively working against you (again more on this later).
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.
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All the best till next time.