New Forex Traders Can Survive With Low Leverage

As a trader, you must be aware of both the advantages and disadvantages of trading with leverage.

For example, a 100:1 ratio means that for every $1 in your account, you can enter into a deal for up to $100.

You can trade up to $100,000 at 100:1 leverage with as little as $1,000 in margin in your account.

This means you have the opportunity to profit on a trade worth $100,000!

It's like a tiny guy with a long forearm entering an arm-wrestling match.

Even if his opponent is Arnold Schwarzenegger, if he understands what he's doing, he'll generally come out on top due to the leverage that his forearm can provide.

When leverage is used correctly, it can significantly increase your profits. Your mind expands, and you begin to believe that you are the greatest trader that has ever lived.

Leverage, on the other hand, can operate against you.

Leverage will AMPLIFY your potential losses if your transaction moves in the opposite way.

You'll be out of money faster than Mike Tyson can gnaw off your ear.

Here's a graph showing how much your account balance changes based on how much leverage you have.

Let's imagine you bought USD/JPY at 120.00 and it increased by 1% to 121.20.

Here's how leverage would effect your return if you traded one ordinary 100k lot:

Let's say you bought USD/JPY at 120.00 and it drops to 118.80 after a 1% drop.

Here's how leverage affects your return (or loss) if you trade one regular 100k lot:

You have less “breathing room” for the market to move before a margin call if you utilize higher leverage.

“I'm a day trader, I don't need no stinkin' breathing room,” you're presumably thinking. I simply employ stop losses of 20-30 pips.

So, here's what we've got:

Example No. 1

You deposit $500 into a micro account that trades 10,000 mini lots and only requires a.5% margin.

You purchase two EUR/USD small lots.

($20,000 / $500) forty ratio one is your genuine leverage.

A 30-pip stop loss is set, and it is activated. Your loss is $60 ($1/pip multiplied by two lots).

You've just lost 12% of your account ($60 loss on a $500 balance).

Your account balance has increased to $440.

You think you've had a rough day. You're feeling good the next day and want to make up for yesterday's losses, so you decide to double up and buy four mini lots of EUR/USD.

The true leverage is approximately 90:1 ($40,000 / $440).

Your typical 30-pip stop loss and trading losses are established.

$120 ($1/pip x 4 lots) is your loss.

You've just lost 27% of your money ($120 loss on a $440 account).

Your account balance has increased to $320.

You trade again because you feel the tide will turn.

You purchase two EUR/USD small lots. The true leverage you have is around 63:1.

You lose again after setting your regular 30 pip stop loss! Your loss is $60 ($1/pip multiplied by two lots).

You've just lost about 19% of your money ($60 loss / $320 account). Your account balance has increased to $260.

You're becoming irritated. You try to figure out what you're doing incorrectly. You believe you're using too tight of a stop.

You buy three small lots of EUR/USD the next day.

Your true leverage ($30,000 / $260) is 115:1.

You increase the size of your stop loss to 50 pips. The trade begins to go against you, and it appears like you're about to be stopped out once more!

But what follows is even worse!

You've been given a margin call!

Your Used Margin was $150 because you opened three lots with a $260 account, but your Usable Margin was only $110.

Because you had three lots open, the deal went against you by 37 pips, and you received a margin call. Your position was liquidated at the current market price.

The Used Margin that was returned to you following the margin call is the only money you have left in your account which is $150.

Your trading account has dropped from $500 to $150 after four trades.

A score of 70

Congratulations, you'll be losing the rest in no time.

It's fairly uncommon to lose four trades in a row. Traders with more experience have streaks that are similar to or even longer.

They're successful because they don't employ a lot of leverage.

Most people cap their leverage at 5:1, but they rarely go that high and instead stick to a 3:1 ratio.

The fact that skilled traders' accounts are appropriately financed is another reason they succeed!

While learning technical analysis, fundamental analysis, sentiment analysis, building a system, and trading psychology are all important, we believe the most important factor in whether you succeed as a forex trader is ensuring that your account is adequately capitalized and traded with smart leverage.

Your chances of becoming successful are considerably lowered if you start with a small amount of money. On a small account, it's impossible to mitigate the impacts of leverage.

Low leverage combined with correct capitalization allows you to realize very little losses, which not only allows you to sleep at night but also allows you to trade the next day.

Example No. 2

Bill establishes a $5,000 trading account with a 100k lot size. He is using a leverage of 20:1.

On a daily basis, the currency pairings he trades move anywhere from 70 to 200 pips. He protects himself by using tight 30 pip stops.

He will be stopped out for a loss of $300.00 if prices move 30 pips against him.

Bill believes that 30 pips is appropriate, but he underestimates the market's volatility and is regularly stopped out.

Bill had had enough of being stopped four times. He decides to give himself some breathing room, deal with the swings, and raise his stop to 100 pips.

Bill's leverage isn't as high as it once was, at 20:1. He's down to $3,800 in his account (due to four losses of $300 each) and is still trading one 100k lot.

His leverage has already surpassed 26:1.

He decides to increase the distance between his stops to 50 pips. He starts a new trade with two lots, and his 50-pip stop loss is struck two hours later, resulting in a $1,000 loss.

He now has a balance of $2,800 in his bank account. His clout is immense about 35:1.

He tries it again, this time with two lots. The market rises 10 pips this time. With a profit of $200, he cashes out. His balance rises to $3,000, a tiny increase.

He creates a new position, this time with two lots. He exits after the market drops 50 points. He now has $2,000 in his pocket.

“What the hell？” he exclaims as he takes up another position!

The market continues to fall by another 100 pips.

He only has $1,000 margin available because he has $1,000 locked up as a margin deposit, therefore he receives a margin call and his trade is liquidated immediately!

He's down to $1,000, which isn't even enough to start a new job.

With a total of eight trades, he lost $4,000, or 80% of his money, despite the market only moving 280 pips. There are 280 pips! The market moves 280 pips quite quickly.

Do you see why leverage is the number one killer of forex traders？