I'm sure you've seen ads from forex or futures brokers touting the incredible leverage you can have trading.  While it is true that leverage is great when a trade moves in your favor, it can wipe out your account in an instant when it goes against you.

For example, many forex brokers offer 100:1 leverage on forex trades.  Some even offer 400:1 leverage, but since 100:1 is extreme enough, we'll stick with that for this example.

So, let's say you purchase 1 standard forex lot on the Euro to US Dollar (EURUSD).  You are hoping that the price will go up, so you can sell at a profit.  1 standard lot has a value of $100,000, and you only need $1,000 in margin to make that trade.  Every pip that the trade moves will mean a $10 profit or loss.

At this point, you might think, "well, $10 per pip is only 1% of my account, so that is a pretty small number.  My risk isn't that high."  But, in an average day, the range (the high minus the low) of the EURUSD pair is about 100 pips, or $1,000.  And during the financial crisis of 2008, the daily range was as high as 480 pips, or $4,800!

Therefore, on any given day, you could easily gain or lose thousands per day.  While the thought of making $1,000 on a $1,000 margin deposit is no doubt appealing, think of the downside.  You could easily lose ALL your margin (and then some) in a day.  That doesn't sound quite as appealing, now does it?

What should you do to avoid this double edged sword of leverage?  Simple - if you think you have any kind of tradable edge, trade it at first with very small leverage, for example 2 to 1.  In the forex example, that would mean you would need $50K to open 1 standard position, which obviously isn't very palatable to those with small accounts.  But, the point is if your system does not work, high leveraged trades will only wipe you out sooner.  Why throw your money away until you know you have something that works?

Remember, you are joining a game where 90% of people lose.  Your best chance of success is to trade small until you know you have an edge, then when you feel comfortable, you can increase the leverage you use.  Using high leverage right from the beginning is a quick way to eventually, and almost inevitably, blow your account out.