You don’t have to use heavy leverage to be vulnerable to the risks of high leverage: if your broker offers relatively high leverage, such as 200, 400, 500, or even 1000, this may be a red flag. Furthermore, if the incentives are true of incredible proportions, this may be a red flag. Leverage is restricted in some jurisdictions to 100:1, 50:1, or much smaller ratios. This should be sufficient, and many traders do not exceed the leverage of 10:1.
High leverage, of course, provides amazing opportunities as well as a fast way to wipe out your account. Let’s presume you’re successful with high leverage or you’re not taking advantage of the leverage available to you. If your broker only provides that kind of leverage, you’re still taking a chance.
The broker is at risk
If the broker depended on its market maker system to balance out the orders and did not cope with the risk, as well as with its liquidity providers, a few over-leveraged transactions that all swing in one direction in favor of the customers plainly puts the broker at danger. Some traders also refuse to pass orders to liquidity suppliers, opting instead to wait for an inexperienced forex trader to torch the account and pocket the trader’s deposit as a benefit.
When they see that everybody is short EUR/USD, the more serious brokers either properly handle risk or do not expect the risk. Other brokers use an ECN/STP model, in which they act solely as a middleman between traders and the market, taking little risk. However, in the event of a large transfer, some accounts may be closed, while others may become inflated, with clients demanding money that has not been read.
Imagine a bank where the net worth of the accounts is immediately compounded by 100, and customers are queuing up to remove their recently discovered wealth. It’s possible that the funds aren’t available. This is equivalent to a group of heavily leveraged traders who hit it out of the park on a deal without the broker adequately managing the risk.
Bonuses and Tricks
If a broker offers incentives in addition to incredibly high leverage, this adds to the burden in the event of a winning dealer. Usually, the high leverage is used to attract beginners on the market and this is why it is important to search for valid brokerage companies for which the best option is reading the reviews thoroughly. As this Milton Prime review shows, there is detailed information about the technical characteristics, which makes the company more reliable in comparison to others. The chance of the money not being withdrawn increases as the broker’s debt to the customer grows. When different tricks are used, things get more complex. Here is an example: In June of 2014, you and your partner opened two accounts, each receiving a profit, and trading in opposite ways. The EUR/USD is long for one and short for the other. Both accounts make use of a large amount of margin.
In the case of the EUR/USD transfer in the previous year, a trader who opened a 1,000,000 position deposited with 2,000 EUR in the account could lose those 2,000 EUR and the remaining theory on the account or earn $1,500,000.
Lack of regulation
A broker who is offering high leverage is unlikely to be controlled or regulated under any jurisdiction. High leveraging is not permitted by strong regulatory bodies. In the event of a confrontation, a sloppy setting may mean less defense. As we’ve seen in many situations, a reputable regulator does not guarantee complete protection, but the risks of trouble are reduced.
And if you want to take advantage of incentives or promotions in the most legal way possible, you can get into trouble with the dealer, and getting help from the police would be difficult.
Summing It Up
There will surely be 100 percent trustworthy brokers that give high leverage to those willing to take the gamble, as well as incentives that are offered according to strict rules, with immediate withdrawals.
Strong leverage, on the other hand, puts the brokers at risk, because while they’re at risk, you’re at risk. Have you ever dealt with a dealer who was suffering from a leverage hangover? Have you ever seen a broker refuse to let you withdraw your funds?
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