There is a lot of money to be made in the Forex marketplace. Investors the world over have been funneling more and more money into the foreign-exchange market, capitalizing on its truly global nature, it’s volatility, and its ease of access.
Another attractor to the Forex world is the fact that so many top-flight brokers are willing – and even eager – to offer leverage to investors, giving them a chance to make outsized profits compared to the kind of money that they fund their accounts with. Can Forex leverage put you in debt, a mountain of debt that’s almost impossible to dig out of?
Using leverage within the forex market will not put you in debt if you trade with a broker that offers Negative Balance Protection. If you trade with an unregulated broker, it’s possible that slippage combined with leverage will put you into debt with your broker. Leverage is a double edged, it can cause traders to lose their account balance extremely fast.
Can Forex Leverage Put You in Debt?
Leverage is the ultimate double-edged sword in the world of Forex (and in investing in general).
Used correctly – and strategically – it can fast track you to the kinds of profits that would have taken months (if not years) to accumulate otherwise.
Used incorrectly, though, and nothing will wipe out your Forex account faster.
Leverage, after all, is simply you borrowing money from your Forex broker directly so that you can make trades with larger amounts of money (higher volume) and – ideally – earn more in profits.
Most of the legitimate brokers in the Forex world today offer 1:10 times margin to their clients. This means that if you deposit a dollar into your Forex broker you’ll actually have $10 to invest with. $1000 turns into $10,000.
On the flip side of things, though, if you set up your account to take advantage of Forex leverage and lose on a trade there are some pretty negative consequences:
For one thing, if you end up in a margin call you’re going to lose every single penny that you have in your account. You basically get a reset to zero (though you won’t owe any extra money to your broker).
If you don’t get a margin call, though, it’s possible that you do end up with a negative balance.
A lot of top-tier brokers have Negative Balance Protection in place to automatically avoid these kinds of issues, but they may or may not hold you personally liable for the debt if you go under.
In those situations, you’ll actually have to pay back the money you owe your broker before you can start your account again and begin trading.
What is Leverage in Forex?
Leverage in Forex works similarly to the way that leverage in any other investment works, basically by giving you access to more funds to trade with than what you have deposited into your account.
Most Forex brokers are going to tie the kind of leverage that they offer you directly to the amount of money that you have deposited into your account.
New accounts without a lot of trading history and with relatively small deposits are likely going to start around 1:10 times leverage.
Deposit more money into your account (and have a couple of successful trades, win or lose, under your belt) and it’s not unreasonable to unlock 1:50 times, 1:100 times, or more leverage depending on the broker that you are doing business with. Some unregulated forex brokers offer 1:1000 leverage!
At the end of the day, leverage is either going to give you much bigger profits than you would have earned on your trades with just the money you had on deposit or significantly larger losses.
Remember, depositing $1000 into a 1:10 times leverage account gives you $10,000 to play with.
The Pros and Cons of Using Leverage in Forex
As we have highlighted a number of times already, there are significant upsides (pros) and some very real downsides (cons) to using leverage in Forex.
Can Forex leverage put you in debt – and can it help you make more money than you ever thought possible?
Both of those things can be true which is why it’s important to run through the pros and cons we highlight right now.
On the plus side of things, leverage dramatically increases the potential profits you can get on your Forex trades.
It isn’t at all in reasonable (or uncommon) for leverage to double – or significantly increase – the kind of profits that Forex traders get from their successful trades.
Leverage also increases capital efficiencies in a big way. You end up getting faster results (and bigger payouts) than you would have if you were toiling around with smaller amounts of money, like your deposit alone.
Lastly, Forex leverage also provides a great hedge against low levels of volatility.
Lower volatility currency pairs (like USD/EUR) don’t have the kind of “movement” to make people foolishly wealthy in Forex all on their own.
With leverage, though, you can trade a significantly higher volume of these lower volatility currency pairs than you would have otherwise – and that can make them much more effective trades.
On the downside, leverage always – ALWAYS – exposes you to significantly more risk for heavy losses.
Can Forex leverage put you in debt?
You bet it can, especially if you don’t end up with a margin call and instead are on the hook for all the leveraged losses you ended up with on a bad trade.
At the very worst, all of the money that you’ve deposited into your Forex account (even money you’ve made on other trades) will get eaten up until your account hits zero and then you’ll be able to begin again from scratch.
Can You Trade Forex Without Leverage?
There’s no reason you can’t trade Forex without using leverage, but most agree that if you’re looking to make the most of everything that Forex has to offer it’s not a bad idea to use leverage strategically.
This doesn’t mean you should use up every bit of leverage your broker makes available, drop it on a gamble, and hope for the best.
No, you have to be smart and you have to be strategic.
With the right leveraged trades you can make more money on a single move than you would have in a handful of months (or even that entire year) just using the money that you had deposited into your account.
In Summary – Can Forex Leverage Put You In Debt?
In conclusion, forex leverage can definitely have a substantial risk level associated with it. If you’re not careful, though – and you don’t use the right strategies – there is a good chance that leverage could leave your account in debt.
On the other side of things, if you make decent trades and manage to take advantage of strong market conditions you can be in a substantially better position than you ever could have been if you didn’t use leverage.
Everyone agrees that forex leverage can put you in debt, but the question is: will it help you to make more money than you would have trading without that leverage?
Has leverage ever put you into debt? Let me know in the comments down below.