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Low leverage is dangerous, why?
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togr

Member Since Feb 22, 2011  3409 posts vontogr (togr) Jun 02 2016 at 13:39 (edited Jun 02 2016 at 13:40 )
LOW leverage is in fact dangerous. WTF I am saying that?
It is simple - to get the same profit you need to invest and thus risk more money.
Lets say you want to trade 1 lot of EURUSD with SL/TP=100 pips.
With leverage of 1:3 you need 100000*1.12/3= $37,000 to cover the margin so you have to have account of $40,000 to trade 1 lot.
You are risking these $40,000 as anything could happen.

With leverage of 1:500 you need 100000*1.12/500= $224 to cover the margin so you have to have account of $1000 to trade 1 lot.
You get the same profit or loss on both accounts for trading 1 lot. Lets say profit of $100.
For 40k account it is just 0.25%
For 1k account it is 10%.

So it is much better to have 40 accounts of 1k with high leverage and diversified portfolio of broker/pairs/strategies than having one 40k account.

I like what I trade, I trade what I like
JacoAF

Member Since Jun 14, 2013  109 posts Jaco Ferreira (JacoAF) Jun 02 2016 at 17:04
Interesting... However, any form of leveraging can be dangerous if you have no clue how to apply proper risk management on your portfolio. High leverage (e.g. more than 200) is very dangerous to NEW traders, who tend to place more trades (because each trade requires less margin). New traders also are less disciplined in using correct stop-loss and take-profit levels, which could result in holding onto multiple high-leveraged losing trades for too long, resulting in blown accounts very quickly.

I think you have a valid point if you are an experienced trader with a solid proven trading system. It makes sense to use high-leveraged accounts when a proven risk management strategy is applied.

But I would not advise any new trader to open a high leverage account (e.g. 1:500) on their first attempt at trading, while they are still very inexperienced in terms of risk and money management, solid technical and fundamental analysis as well as being able to handle the emotional stress associated with trading, especially manual trading.

Anyway, very interesting post indeed! smiley

Keep it simple, be disciplined, get rich slowly and above all protect your equity!
togr

Member Since Feb 22, 2011  3409 posts vontogr (togr) Jun 02 2016 at 19:35
JacoAF posted:
Interesting... However, any form of leveraging can be dangerous if you have no clue how to apply proper risk management on your portfolio. High leverage (e.g. more than 200) is very dangerous to NEW traders, who tend to place more trades (because each trade requires less margin). New traders also are less disciplined in using correct stop-loss and take-profit levels, which could result in holding onto multiple high-leveraged losing trades for too long, resulting in blown accounts very quickly.

I think you have a valid point if you are an experienced trader with a solid proven trading system. It makes sense to use high-leveraged accounts when a proven risk management strategy is applied.

But I would not advise any new trader to open a high leverage account (e.g. 1:500) on their first attempt at trading, while they are still very inexperienced in terms of risk and money management, solid technical and fundamental analysis as well as being able to handle the emotional stress associated with trading, especially manual trading.

Anyway, very interesting post indeed! smiley


Well even newbie trader could work with high leverage using fixed stop losses and lets say max XXX trades od size of YYY on account of ZZZ balance. Well ANY even newbie trader should have trading plan including position sizing based on leverage:)

I like what I trade, I trade what I like
Magiic

Member Since Jul 08, 2014  435 posts Magixs (Magiic) Jun 03 2016 at 08:12
I agree with you

Keep at it
Magiic

Member Since Jul 08, 2014  435 posts Magixs (Magiic) Jun 03 2016 at 08:16
***When I posted I could only see the first post.

Newbies should still understand leverage, it is relevant and I don't know who would start trading with real money and not understand what leverage is. It's mentioned everywhere, and it's self explanatory...


Keep at it
togr

Member Since Feb 22, 2011  3409 posts vontogr (togr) Jun 03 2016 at 08:19
Magiic posted:
***When I posted I could only see the first post.

Newbies should still understand leverage, it is relevant and I don't know who would start trading with real money and not understand what leverage is. It's mentioned everywhere, and it's self explanatory...



People often misunderstand leverage as sort of emergency stop loss. It is not.
Margin is actually limiting your position size. Stop loss (and take profit) are completely different instruments.

I like what I trade, I trade what I like
rickylk684

Member Since May 18, 2016  2 posts Ricardo A. Grados (rickylk684) Jun 09 2016 at 06:35
great points !!

RG
clessm

Member Since Jun 07, 2016  31 posts ReidHershel (clessm) Jun 12 2016 at 18:40
Interest topic

But i think .....


with no leverage or less leverage


You not need to Stop loss any way

if we know risk,we will not ruin // Novice Trader :
Janeo

Member Since Sep 14, 2016  18 posts Janeo Sep 28 2016 at 12:09
Low leverage is dangerous but advantageous as well. If it adds to profits , it adds to losses as well. You need money to make money. Leverage is like adding additional money to your account which let you trade more. Leverage gives big profit with small investment .Also leverage and profits are nowhere related. Higher the leverage ,lower will be the margin required to place a trade. So if leverage will be low, the margin requirement would be high and more money would be at stake.

JacoAF

Member Since Jun 14, 2013  109 posts Jaco Ferreira (JacoAF) Sep 28 2016 at 12:30 (edited Sep 28 2016 at 12:31 )
Hi Janeo,

I just like to correct something...

Leverage has nothing to do directly with how much profit you make. For example, open two demo accounts, one with 1:50 leverage, and one with 1:500 leverage. Now place a single 1 standard lot trade on each of the accounts, with both a 10 pip stop-loss and 10 pip take-profit. You will see that both accounts will make exactly the same profit or loss.

High-leverage is definitely dangerous when you over expose yourself. By this I mean, because high leverage require only a small amount of your available free-margin, traders tend to place too many trades. Yes you can make money quicker if you place many trades, but you can also loose money just as quick.

Another experiment you can do is this. Use the same two accounts, and place as many trades as you have free margin in the account. So use up all available free margin. And try and place all trades in the wrong direction. The idea is to see which account will last longer. I can guarantee you the low leverage account will last much longer than the high leverage account.

The point is this, new traders tend to gravitate towards high leverage accounts, because they can place more trades and in theory make more money. Inexperienced traders will either place too many trades and will take too many losses from the market hitting the stop loss. Eventually they will stop using stop-losses and what usually happens is they will start with one trade, lets say a buy. Markets turns against them, and they wait for that 'bottom' and place another buy, because the market will turn higher and they will make their money back or average out. This starts an emotion and psychological 'war' within themselves. They keep buying, because they are certain the market will turn soon. They get angry with the market and keep placing buys, sometimes even doubling up. The more emotional they get, the more mistakes they make, the more angry or scared they get. Soon they take HUGE losses or even wipe out their accounts.

This sounds silly, but new inexperienced traders do this every single day. I'm not saying someone with 5 or 10 years trading experience will do this sort of thing, but high leverage is inherently dangerous to new and inexperienced traders. I would not recommend leverage higher than 1:100 for new traders, preferably if you have enough capital to invest, rather open a 1:50 account.

Keep it simple, be disciplined, get rich slowly and above all protect your equity!
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HIGH RISK WARNING: Foreign exchange trading carries a high level of risk that may not be suitable for all investors. Leverage creates additional risk and loss exposure. Before you decide to trade foreign exchange, carefully consider your investment objectives, experience level, and risk tolerance. You could lose some or all of your initial investment; do not invest money that you cannot afford to lose. Educate yourself on the risks associated with foreign exchange trading, and seek advice from an independent financial or tax advisor if you have any questions. Any data and information is provided 'as is' solely for informational purposes, and is not intended for trading purposes or advice.