Hi @C48R3RA,
We used a standard lot in our example, because, as the name implies, it is a common trade size.
We did not make assumptions about your trade size, but since you intend to start trading micro and mini lots, it’s important to understand the risk is the same in percentage terms if not in dollar terms.
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If you use the full 200:1 leverage offered by the unregulated broker you considered, then you would be trading one mini lot (10,000 units of base currency risking about $1 per pip) for every $50 in your account. That means a 50 pip move against you would completely wipe out your account, and a market gap greater than 50 pips would lead to a negative balance in your account.
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If you use the full 200:1 leverage offered by the unregulated broker you considered, then you would be trading one micro lot (1,000 units of base currency risking about 10 cents per pip) for every $5 in your account. That means a 50 pip move against you would completely wipe out your account, and a market gap greater than 50 pips would lead to a negative balance in your account.
You can be sure as well, once you understand the math behind the use of leverage.
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If you place a trade without leverage (in other words, the money in your trading account is enough to cover the full face value of the market position you open, which is the same as 1 to 1 leverage) then it would take a 100% drop in the value of the currency pair you buy for your account to be wiped out.
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If you place a trade with 2 to 1 leverage (in other words, the face value of the market position you open is twice the value of the money in your account) then it would take a 50% drop in the value of the currency pair you buy for your account to be wiped out.
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If you place a trade with 10 to 1 leverage (in other words, the face value of the market position you open is 10 times the value of the money in your account) then it would take a 10% drop in the value of the currency pair you buy for your account to be wiped out.
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If you place a trade with 50 to 1 leverage (in other words, the face value of the market position you open is 50 times the value of the money in your account) then it would take a 2% drop in the value of the currency pair you buy for your account to be wiped out.
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If you place a trade with 200 to 1 leverage (in other words, the face value of the market position you open is 200 times the value of the money in your account) then it would take a 0.5% drop in the value of the currency pair you buy for your account to be wiped out, or about 50 pips depending on the exact currency pair in question.
The key point here is that increasing leverage increases risk.
The good news is you don’t have to use all the leverage that’s available to you. It’s important 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.
(To continue the car analogy, an unregulated broker that tries to entice you with more leverage than is allowed by law where you live is like speeding in a car that does not pass inspection and is not street legal. Is this the best option for a brand new driver?)
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 | Page 4
It would be very hard to limit your risk to only 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 (30:1, 50:1, 200:1 or 400:1, 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.