A lot of new forex traders make the mistake of starting their trading accounts with bare minimum capital and sky-high leverage. Leverage is a valuable forex trading tool that can help you earn more profits without investing more of your money, but the misuse of leverage can lead to catastrophic failure and total loss of your trading capital.

It is advised to stick to a leverage of 100:1 or less. A lot of online forex brokers are offering leverage of up to 1000:1 because they are trying to attract new and smaller forex traders into the market. Although these offers are great, you shouldn’t be tempted to use them at all.

With a leverage of 1000:1, for example, you only need $100 to trade a full lot. This means you will earn $10 for every pip of gain you bank. However, you must not forget that you will also lose $10 for every pip you lost. Imagine if the market moves against you by as little as 10 pips; you will lose all your capital in a matter of seconds.

From the previous example you should be able to understand that leverage is not something to be taken lightly. Unless you have enough capital to trade at 100:1 leverage or less, you shouldn’t enter the forex market. You can also opt for smaller account types – mini accounts or micro accounts – and set the leverage to 100:1 if you still want to trade forex with smaller starting capital to begin with.