leverage can destroy your account if you don't believe me ask anyone who's blown an account before but it can also create some incredible returns based on your deposit there's two ways to use leverage one of which will help you in blowing that account which you don't want to do the other will help you maximize the gains you can make on every single trade so in today's video I want to teach you how to avoid the pitfall of blowing an account because of leverage and how to maximize every trade you place using leverage so if leverage is something that you have been confused about it all then pay attention throughout today's video because I'm gonna clear everything up for you and what I need you to do before I roll the intro and disclaimer and get this video started is go ahead and click that like button to help out with the YouTube algorithm hit the subscribe button if you're interested in learning more about the forex market we come out with new free videos each and every week here on YouTube and follow us on Instagram over at the trading channel and I will see you right after the intro de Slater [Music] what's up and welcome to lesson number four in our all-inclusive beginner forex trading course that is going to be everything that you need in order to start your forex trading journey this video you read it right folks is all about leverage so by the end of this video you're not only going to know what leverage is but you're also going to understand why a lot of traders end up blowing accounts because of it how to avoid that and the proper way to actually use leverage by the end of the video so let's go ahead an get started with what is leverage and the way we're going to do that is by using an example of the housing market so it's going to get started with that right now let's say by the way in the housing market when you want to get a loan for a house you actually need 20% down on that property in order to purchase that property so let's say you find a property that you want to invest in and this property is $100,000 in the case of this property B property being $100,000 how much do you need to deposit how much of a down payment do you need in order to buy this house or invest in this house you need $20,000 right so let's say you come across the greatest bank in the world and they come up to you and they say hey we know you want this property what we're gonna do is we're going to take your $20,000 and we're gonna give you this one hundred thousand dollar piece of property you can hold it as long as you want you don't have to make any payments on this property but when you decide to sell it you still owe us $100,000 so that means if the market crashes and this houses property drops like crazy you still owe us $100,000 whenever you decide to sell and if the housing market goes up vice versa you still owe us $100,000 so let's do this scenario let's say you say okay yeah great deal it is an amazing deal so let's do it and you buy this hundred thousand dollar property with a twenty thousand dollar down payment and you have no payments and then throughout the course of 12 months the housing market drops 50% oh no right so now your property that was worth $100,000 is now only worth $50,000 but guess what that Bank already told you whether the market goes up or down you owe us our $100,000 back so in this case you decide to sell for a loss how much did you lose on this house you lost that $50,000 that sucks right so this is the power of leverage in terms of how it can hurt you you lost more than your initial down payment more than your deposit maybe more than you had if $20,000 is all you had to invest is this sounding familiar kind of like leverage in the forex market and some of the horror stories you've heard so that's how her leverage can hurt you right and in terms of helping you we can do this other scenario because guess what just as bad as it can hurt you it can help you make ridiculous returns as well when you use it correctly so let's say the same scenario you pay twenty thousand dollars they say here's this one hundred thousand dollar property to hold this time instead of the market dropping by 50 percent we go up 50 percent over the next twelve months so with the housing market going up 50 percent you now have this property that was worth a hundred grand that is now worth one hundred and fifty thousand dollars and guess what the bank says the same thing whenever you sell at that 12 month period the bank says okay you've sold us 100k in that case you give them their 100k back and you end up with a plus $50,000 profit so in this case you made more than your initial down payment that is the power of leverage leverage can allow you to make ridiculous returns and also unfortunately can cause you to lose even more than you initially invested now forex is a little different because there's a thing called margin call but now that you know what leverage is let's relate it back over to forex and by the way this bank the twenty thousand dollars and will let you hold a 100k property it's the broker so let's jump into an action we'll Forex scenario with this being the case go ahead delete all of this so in forex I'm gonna draw out a little graph here we have about four different types of major leverage that people or brokers allow you to have and we have one to ten leverage one to twenty one to fifty and one to one hundred leverage now each of these means that you have your account times the leverage you get in buying power so let's say you have a one thousand dollar account just to make math super simple that means with one to ten leverage you have ten K buying power one to twenty you have twenty K buying power this is self-explanatory but I'm gonna write it down anyway fifty K buying power at one to 50 and 100 K buying power at 1 to 100 now here is the reason most traders blow their entire accounts using leverage most traders say I have a thousand dollar account but but I have ten K in buying power so what do I need to do obviously I need to buy 10,000 units of the euro dollar and hope that that goes up that's not how you want to use leverage that is the worst way to use leverage and let me help you understand why we're gonna use $1,000 account size as an example and we're gonna use the fifty to one leverage because in the United States that is the maximum amount of leverage they allow you to have and personally fifty to one leverage is what I use so with a one thousand dollar account let's look at this as if you don't have any leverage you have a thousand dollar account we've talked about order sizes right how many units can you purchase with a one thousand dollar account and no leverage at all one thousand units right self-explanatory one thousand units what is one thousand units that is a micro lock one micro lot on most pairs means that you are the value of a pip for your position stay with me if you haven't studied lot sizes and stuff we have another video on that that you've probably just watched hopefully this 1000 1000 unit micro lot is worth 10 since / pic okay so if you have a $1,000 account that means you can trade at maximum if you are all in on a trade you can have one thousand units of a currency let's say you have one thousand units of the euro dollar and you say cool have one thousand units these this micro lot means that every pip the euro dollar moves is ten cents per pip in this case I want you to look at risk as how many pips you can lose how many pips could you lose at $0.10 a pip if you have a thousand dollar account and no leverage you could lose ten thousand pips before you blow your account that's also it this is why not using leverage at the beginning is pretty good idea if you're just now starting out you're gonna have a lot of losses but if you have ten thousand pips of room before you blow your account then you would have to lose a lot of trades to actually blow your account here's where leverage actually can really hurt you because let's take this theme same 1000 dollars and will actually keep all of this on the screen we have this one thousand dollars sorry if it gets a little messy here guys I'll color this a different color to make it a little bit easier let's go with blue I like blue so we have this 1000 dollar account but now separate this now you have your 1000 dollar account with a fifty to one leverage which means you have fifty thousand dollars in buying power now here's what you need to understand the brokerage is not gonna let you lose 50 grand before you lose the one grant that you have they are going to do something called margin call this number your capital is called margin fifty to one on leverage means that you have for every one dollar of margin you have 50 dollars that you can put into a position so in this case let's say you maxed it out and you said I have 50,000 units to trade the guy that we were talking about on the euro dollar right I've got my 50,000 units let me just buy the euro dollar right now so you buy euro USD same example and with this euro USD trade you expect your full 50,000 units what is 50,000 units remember 10,000 units is a mini lot and a mini lot has a value per pip of $1 so if we have five mini lights how much is our value per pip on this trade our value per pip which we're gonna label with V P P on our euro dollar trade is five dollars you see the difference here this was ten cents per pip but because we're using leverage over here we have five dollars per pip now can this work for you absolutely yet you can make a lot more money at five dollars per pip then at ten cents per pip no one is doubting that I'm not saying you can't do that but as a beginner do you think it's more like that you're gonna hit homeruns or swing and miss most the time swing and Miss you're right a lot of times as beginners you're expected to lose right so it's okay to lose but if you have your entire account balance your $1,000 in margin which gives you fifty thousand dollars in buying power on this position how many pips do you have that you can lose before your account goes to absolutely zero where it was ten thousand pips now the math we have to do is your five dollars per pip and your account balance so now what we need to do is take your account balance of 1000 dollars because again they're not gonna allow you to lose more than a thousand dollars and if you're risking five dollars per pip that means you divided by five dollars let's do this that's finished the math that means you only have two hundred pips because two hundred times five is a thousand dollars that takes your count away so instead of 10,000 pips of risk the reason most traders blow their accounts using leverage is because they only have 200 pips of risk and guess what you don't really have 200 pips of risk because they are going to margin call this is the weirdest-looking pin and we certainly change that sorry margin call you and somewhere around 80 to 90 percent so instead of 200 pips it's more like you have about a hundred and sixty pips maybe a hundred and seventy pips of risk before you get a margin call which is when they take all of your trades away and you're left with a balance of about 10 percent of your original capital so you would be left with $100 account after one hundred and sixty pips of movement out of the euro dollar if you just had one wrong guess so let's say you do this and you guess wrong on the euro dollar and you're new so you don't understand stop losses and the euro dollar moves at 160 pips which is doing multiple times every day at this point because the volatility we're seeing in the market you could lose your whole account balance in one day doing this that's what that's the danger and the reason that most beginners using leverage end up blowing their account before they have a chance to make any money at all that's the danger of leverage and that's what you need to understand there's a correct way to use leverage as well this would be the wrong way to use leverage you don't want to max out you don't want to max out and be trading with leverage and trading your entire account value because that gives you a very small margin of error again we're talking about that 200 pips is all you have it probably closer to about 160 so if you only have 200 pips that you can lose that's a pretty easy amount to lose it's easy to lose 200 pips in a day in the way the markets are moving right now again the danger of leverage is that you have way less risk that waitwait less pips you can lose before you blow your entire account 200 against the 10,000 with no leverage at all so that's the wrong way to use leverage what's the proper way to use leverage that's how you blow an account using leverage how do you use leverage to your advantage to actually make more than your initial deposit let's go over that right now so here is the proper way to use leverage one lesson number one always use a stop loss if you're using a leveraged account if you're you're putting yourself in this ridiculous risky situation and as traders avoiding risk is half the battle so always and I mean always use a stop-loss with leverage but let's talk about the power of leverage and what it can actually help you do same scenario we've been discussing thousand dollar account with fifty to one leverage so if you have a one thousand dollar account and fifty to one leverage what's the correct way of using that leverage well its first to decide what your risk management plan is gonna be how much are you gonna risk per trade for me and only for me I'm not suggesting anything to you this is for entertainment I hope you're entertained for me I risk between 1 & 2 percent of my total account balance per trade so in this case that would be 10 to 20 dollars that's to keep it simple with ten dollars so if I want to risk ten dollars let's say I want to risk two percent of this which is ten dollars on a trade I need to know the amount of pips I'm going to lose or could possibly lose in order to create this ten dollar loss and how do we do that well let's say that we have a 100 pip stop loss okay the euro dollar 100 pip trade the same one we've been discussing during the entire video so this euro USD trade has a maximum loss of 100 pips now in order to create this scenario where I'm possibly losing 10 dollars on a 100 pip loss I have to figure out my price per pip in terms of the 100 pip stop loss and the way you do that is with an equation the equation is the amount of dollars you want to risk which is ten dollars I don't know why I put percent right there ten dollars and this ten dollars has to be divided by the amount of pips we're going to lose ten dollars divided by 100 pips equals ten cents per pip this is where it gets a little bit easier now we know that we need a value of ten cents per pip on this trade why because we have a hundred pips stop-loss and I want to risk one percent of my account which means I need ten cents per pip Tom's that 100 to give me that 10 dollar risk with 10 cents per pip we've talked about this already that means you need one micro lot now one micro lot would cost you $1000 because you are controlling 1,000 units of currency with a micro lot so if you had no margin this would be your entire account but with margin the power of margin and the way to use it correctly after you have all of this calculated you know your stop-loss is putting you at a $10 risk which is one percent of your account value your one micro lot that would cost you a thousand dollars no longer cost you a thousand dollars now it's coming out of something called margin which is your capital so you have this full capital of margin that they are giving you 50 to one on this full capital of margin means you're getting $50 for every $1 you invest into a position so if I'm investing $1000 into a position what do I have to do I have to divide that $1,000 behind my 50 to one leverage which gives me $20 what this means is that instead of costing me my full account of $1,000 in order to place this trade instead of 1,000 this now only cost me $20 so instead of $1,000 on this trade I've only had to put up the deposit of $20 so this is like the bank in the beginning of this video the scenario we talked about houses this is a very similar situation you're giving your broker 20 bucks they're saying here's a thousand units you hold on to that thousand units as long as you want but when you decide to sell that thousand units we want that thousand dollars back no matter what if your investment goes up or down we want that thousand units back so when this investment goes up you make money but if it goes down you still owe them a thousand bucks but instead of losing $1,000 you've only lost ten dollars and here's that math so this is gonna be very familiar math we're looking at euro this is the actual trade itself this is what it looks like euro and dollars what you said is I want 1,000 euros let's do the price of the euro dollar right now price of the euro dollar right now is one point 104 - you said I want 1000 euros this is the actual trade what it looks like in your brokerage I want 1000 units of Europe and they said ok in order to give you 1000 units of Euro the exchange rate right now is 1 point 104 - they say ok if you want 1,000 euros we're gonna need 1104 dollars from you but then the bank goes I've got you at a 50 or the broker to one leverage which means we really only need 20 dollars on margin for you to do this because your twenty dollars is equal to a thousand units so you say cool here's my 20 dollars hold onto it I'll hold this thousand units until the price fluctuates either up or down you still have your same 1,000 units of Euro but now let's say the price drops from the euro from one point 104 - we have a decrease in value down to 1.09 for two which would be a drop of 100 pips which is what our stop loss was set at so when it drops down to 1.09 for two your stop loss gets hit and you say here's your 1000 euros back but now the exchange rate is lower so even though your investment dropped in value they still expect that same 1000 euros in order to give them 1000 euros you now have to hand them one thousand and ninety-four dollars so therefore because of that your investment dropped ten dollars and that's the actual math on this specific trade now in the other scenario let's say that the market goes up 200 pips let's say you had a two-to-one risk reward so let's delete this and do the math on this as well to make sure you fully comprehend leverage this is going to be extremely helpful let's say you had a two-to-one risk reward on this trade so instead of going down a hundred pips now we go to one point one two four - or we rose by two hundred pips a two-to-one risk reward so now your bank said twenty dollars and we'll let you hold 1,000 euros at the price of one point 104 - or one thousand one hundred and four dollars and we'll let you hold this thousand euros as long as you want as long as whenever you pay us back you give us that same one thousand euro value so we say okay cool but this time the euro dollar goes up by two hundred pips so now instead of your investment being worth one thousand one hundred and four dollars your investment is now worth one thousand one hundred and twenty four dollars meaning that instead of losing ten dollars your investment actually went up twenty dollars and the power of having leverage means that instead of spending remember in order to get this position size originally you would have had to spend your entire one thousand dollar account but instead of having to spend your entire one thousand dollar account to make this twenty dollars over here you now have made twenty dollars on an initial twenty dollar investment because of the power of leverage so you've made a hundred percent gain on this specific trade because you have leverage to the point you only spent $20 of your actual capital in order to make twenty dollars on the other side of that so that is the power of leverage and the way of using it correctly so what does leverage really allow us to do in a nutshell if you use leverage correctly it's not going to allow you to trade with this massive size and risk all this money and essentially gamble it doesn't allow you to get rich in three days it doesn't allow you to triple your account this week leverage allows you to be in more trades at one time and to put an initial deposit down of a small amount in order to purchase a larger position when you have a stop loss the stop loss is so important when you have a set risk management plan if you have that set risk management plan you have a $1,000 account and you're doing risk management correctly you're only risking $10 per trade leverage just allows you to be in more trades as long as you have this 10 dollar risk it's okay to be in a bunch of trades you can be in 20 trades and you're still only risking 200 bucks so you're not at all putting your account in jeopardy as long as you have this risk management in place so that's how you combine risk management with leverage and that's the only way you should be using leverage I hope this video has taught you everything you need to know about leverage I know it was a long one but leverage is a kind of a complicated subject that takes a while to understand if you had any doubts or for any reason are confused about leverage I would suggest going back and watching this one more time you will be surprised at the amount of stuff you pick up on again hope this was helpful and I will see you in the next video don't over leverage and don't risk at all
