[B]As I see it, there are 2 possible dangers with using excessive leverage.[/B]
Brokers love high leverage, that way, you have a greater risk of losing your money thro greed, and, of course, your lost money becomes the brokers money.
[B]1)[/B] [U]Broker leverage[/U] is like a water tank.
The bigger the tank, the more water you can put in it.
Now the higher the leverage, the more lots you will be inclined to stuff into your trade -why? - because you can - [U]and more lots means more profit.[/U]
[U]And, of course, more loss[/U] - hence the dangerous risk - even to the point of losing all your money.
The smart trader resists the temptation to pile on the lots at high leverage.
[B]2)[/B] Equity is the funds you have to trade.
Now with higher leverage, smaller margin deposits are needed, hence more equity left over.
That sounds good, but if your trade backfires, funds from your equity are “marked to market”, that is, equity funds are added to your margin to cover your trade as it goes wrong.
The margin call occurs when only an amount equivalent to [U]initial margin [/U]remains unused.
Initial margin for 100:1 leverage account = $1000/lot.
Initial margin for 400:1 leverage account = $250/lot.
Assuming the broker is ethical…
…and 1 lot only is traded…
at a margin call, trader 100:1 gets back $1000
and
trader 400:1 gets back $250.
[B]But it could be a lot worse for trader 400:1 because of reason 1 above.[/B]
…Because trader 400:1 can get 4 lots for the $1000 margin whereas trader 100:1 can only get 1 lot.
Should trader 400:1 choose 4 lots and the trade backfires he will lose 4 times the amount of money that trader 100:1 loses and that is long before a margin call.
Of course trader 400:1 could be wise and put up only 20 microlots.
But is that not really 2 minilots?
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