Is leverage such a “killer” as they say? I am newbie on this, 3 months since I heard of Forex for the first time, and 1 month on live. I see leverage as a scale multiplier, it multiplies your successes or errors n fold, being “n” the leverage factor. Now, is there a difference between trading a micro lot (0.01) with a leverage of 1:100 and trading a mini lot (0.1) with a leverage of 1:10? I can only see leverage as the so called “killer” when even the smallest sized lot the broker allows us to trade is bigger than the position I should enter.
Suppose I open an account with $500, leverage 1:100, I trade micro lots (0.01). That’s $0.10 per pip, it takes 50 pips S/L as a 1% safety margin, 100 pips for 2% S/L. Is there something wrong with that?
Isn’t it the same as opening the account with, say, $500, leverage 1:10, trading mini lots (0.1), opening a position with 1 mini lots at $0.10 per pip?
Now, I would say there could be a problem If I tried to open an account with $500, leverage 1:500, 1 pip for 1 micro lots = $0.50, that means, 10 pips max S/L for 1%
Of course, the idea is to be able to open not the minimum position only (beacuse that leaves you with little margin for closing part of the position later, letting the other run, but just consider this for the sake of simplicity)
Everybody is right here (including the thread starter). Leverage in and of itself isn’t the ‘killer’. It’s what leverage affords you that is the ‘killer’. To answer you question directly: ‘greed’ is the killer and leverage is offered by brokers to ‘prey’ on this ‘greed’. It’s a shortcoming inherent in most human beings I believe and brokers know that given enough ‘rope’ (leverage) the trader will, at some point, ‘hang’ themselves. Why??? Simply ‘because they can’. They have been given the ‘tool’ the do so. And the absolute irony is that the more profitable a new or experienced trader becomes: the more chance there is that there will come ‘that’ day, when all caution is ‘thrown to the wind’, more often than not after a series of profitable trades, and they will take advantage of the fact that they can, because of the huge leverage available to them, get into that ‘one’ trade, overtrade (‘greed’), that will set them back months or years.
I’ll almost guarantee you (and wouldn’t it be nice to have the ‘power’ required to carry this out as an experiment) if leverage was removed from the ‘equation’: those statistics of anywhere between 70% and 95% of all (not only new) traders losing their accounts would be ‘flipped’. First: it would probably eliminate anywhere between 70% and 95% of traders that open trading accounts that are undercapitalised and therefore are ‘doomed’ anyway right from the ‘get go’. Second: those that DO have the money to trade will, in effect, be ‘protected from themselves’. BOTH would, as I noted, I believe, ‘flip’ those percentages (at VERY least).
Basically: it all comes down to risk and money management. If you’re disciplined enough to risk only 2% or 1% (or better: even less) per trade ON EVERY SINGLE TRADE FOREVER AND FOREVER AND FOREVER, while trading with 50 000:1 leverage (my favourite ‘joke’ leverage being 50 000:1 but I have seen leverage on offer FOR REAL of 1 100:1): then ‘good for you’. Then leverage is not a problem for you. But if you’re like 70% to 95% of the population: leverage will eventually BECOME a problem and will be instrumental in your failure.
And has been noted many MANY times of these very same forums: leverage has nothing at all to do with position sizing. 1 000 Units of EUR/USD will give you $0.10 per pip (per FULL pip not fractional pip) movement no matter WHAT your leverage. The only difference that leverage makes is how much of your capital is required and then reserved to open and maintain such position.
If you are a stop-loss trader, then leverage works in your favor when you take the minimum leverage. For no stop loss traders, its the best to opt for maximum possible leverage as it gives you an extra cusion to all your positions.