When it comes to leverage it’s necessary to understand the difference between the maximum leverage available to you, and the actual amount of leverage you are using. Maximum leverage is like the top speed your car can reach, while your effective leverage is like the speed you actually drive your car. And just as you would never drive your car at its top speed, you should never look to open trading positions so large that your effective leverage reaches the maximum leverage available to you.
That’s because leverage magnifies both your gains and your losses. Beginner traders tend to think only about how much money they can make and don’t pay enough attention to how much they could lose. You may find this article helpful in understanding the rationale behind risking only 1% of your account balance per trade: The Most Important Math in Trading | New Trader U
It would be very hard to limit your risk to 1% of your account balance if you are using more than 10:1 effective leverage. That’s why studies have shown that traders who use 10:1 leverage or less tend to perform better than traders who use more than 10:1 leverage.
Regardless of the maximum leverage available to you through your broker (50:1, 100:1 or 500:1, and you should be concerned about the risk management of brokers offering extremely high leverage to clients), you can choose to use 10:1 effective leverage (just as you can choose to drive 45 mph, whether your car has a top speed of 155 mph or 255 mph) which would equate to one micro lot (or 1000 currency units risking 10 cents per pip) for every $100 in your account balance.
A leverage of 1:500 is too high if your position size is too big. 0.01 lot with a 1:500 is in lots of cases no problem at all. The key is risk management and when that is right you can trade with 1:500.
I think the example with the car speed doesn’t fit so well.
The speed is depending on the move of the rate/market. When the market is moving fast, it means there is a lot of wind so you accelerate and get to where you want faster.
The leverage is more like how much can you carry on your sailing boat. 1:10 small sailing boat. 1:500 very very big boat.
Both boats are on the same sea and are using the same wind. But even this example is not fully correct.
I feel u deserved that happening to you, I don’t know y people have go through pain intentionally to understand the Dynamics of trading like seriously why, why do people need to blow up accounts to really click this game, gosh:sleepy:
Seems like a huge lesson for you .I would rather take regular smaller wins than try the huge leverage route ,Especially me being as a newb,Why do i keep reading about people thinking big wins do not chance big loses with huge leverages and no stop loses .
Good luck next time .
Unfortunately you’ve committed a cardinal sin with not having a stop loss , you should be Setting a SL risking no more than 2% of your account on every trade
As consolation, you’re not the only one…
It happened also to me in 2017, but I’m back in the game and l have learned a lot from this interesting site, babypips.
This is a very strong LESSON to keep a stop loss at any cost… at any place whether TIGHT or FAR … STOP LOSS is a must…irrespective of how confident your understanding of the Price movement.
Hi, sorry to hear about your losses and I’ve read some of the answers. Firstly may I say that if you’re referring to the 15th Nov, then that day’s movement was only 182 pips, so for you to be wiped out means you were trading too big a position with too small an account to manage the movement. Stops should be trailing stops at all times.
SL is a must have. But trailing stops is not a must. You can move the SL to break even and then step by step from low to the next low or high to high or leave it where it is or whatever the market is “telling” you. Resistance levels are good SL levels as well.
I remember when that happened. I was thinking the same thing, only I usually eye the Eur for weakness or strength. Stop Loss, important. Especially in this time of political uncertainty… the Brexit and British Gov, seem to be having some real bad issues, so is Italy with it’s populist Gov. Nothing wrong with that, but for the markets it is anarchy!
GBP pairs in general i think hit a lot of accounts this thursday.
This is precisely why we always need to risk only a fixed percentage (personaly i use 3% on each trade)
It is SAD indeed. Using a stop loss is a must and must for any strategy you use. Imagine if you were in the opposite direction, you would have made money my friend.
I have a lot to learn but presently would agree with @Falstaff.
I don’t have real cash on the line but trade my demo account as if I did. I am new to forex and have been vigilant about protecting my capital. I been using a system similar to @rrram2 (he’s been a great help to me - tx @rrram2) which doesn’t include a stopp loss and weathered similar jumps in price the Eur & GBPpairs and have survived. I’m trading .01 lots and keeping an eye on margin levels, DD etc…
Forex is the siren of investing/trading! Beautiful leverage unlike anything seen Hypnotic songs of millions and millions of compounded returns in a few months!
Beautiful leverage unlike anything seen Hypnotic songs of millions and millions of compounded returns in a few months! 