Is Leverage Risky?

Leverage is infinitely less risky than position size. Change my mind.

Depends entirely on the trader. Somebody who knows that they’re doing and can control themselves could trade with 1 000 000:1 leverage and it’d make no difference as they’d still be sizing their positions correctly no matter what. But for Average Joe around these parts: the rule of thumb will be higher leverage = bigger positions.

So in theory there is nothing wrong with your argument. The theory is just unfortunately better than the practice.

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I think what @dpaterso was trying to make you understand is the difference between TRUE LEVERAGE and ACTUAL LEVERAGE.

In the end you are the one in control of your actual leverage (True leverage), your broker simply just tells you how high you can go, in this case up to a million to one. Get it?

So when you do say leverage is less risky than position size, do bear in mind that position size in itself is also a determinant of the real leverage, the higher your position size, the higher your actual leverage and the riskier you are as a trader.

Nominal leverage tells you how high you can leverage your trading, Position sizing gives you the freedom to do it sensibly and not go overboard.

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Leverage allows greater flexibility of your account equity, but exactly this flexibility means you can take higher risk by using bigger lot size to open a trade. But it’s up to you if you take it or not, since it depends on profit target. Big lot size also means big pip value and what it turn means losses in relative and absolute terms will grow faster than with low leverage.
Think about that.

As everyone else is saying, leverage and position size are two entirely separate and different issues.

Leverage is nothing more than a multiple factor that determines how much of your equity is allocated to a particular position as initial margin (or deposit if you like). Leverage itself has nothing to do with risk exposure.

You position size, on the other hand, is everything to do with risk. The bigger the position the bigger the financial value of a pip movement and therefore the larger your risk exposure to adverse price movement.

The only danger with leverage is that a high leverage means a lower amount of margin is allocated per position and therefore one can take bigger positions for the same amount of margin - but it is the size of the position itself which is the risk.

Your risk management parameters should define how much you are willing to risk on a trade in currency terms and from this you then calculate your position size. Having done that, then when the trade is entered, your margin will be based on your leverage level - which does not change your risk exposure at all.

The only caveat here is that with a low leverage the amount of margin is higher and therefore a greater proportion of your total equity - therefore an excessively large position could increase the risk of automatic closure if your initial margin plus floating margin exceed your broker’s limits (in which case a higher leverage/lower initial margin would have helped avoid this - but without changing your actual loss value from the position).

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Leverage could be risky if the trader would use it to overload his tiny account with huge positions, but from the other point of view, it helps to reduce the initial capital necessary to maintain the position. So, it is possible to deposit only a part of trading capital on the trading account whlie the rest of it would stay on your bank account. Such approach could help you to reduce non-market risks related to brokers. That is why leverage is a great tool if you use it properly.
To avoid issues related to leverage, it is necessary to apply widely known money management rules like percentage used per trade and all that. For example, trader should not risk more than specified per cent of his account in one trade.

Three key words here: Leverage, positions - and trader!

Whilst this thread is talking about two of these, you have actually introduced what is probably the greatest risk of all in trading - the trader him/her self.

Inadequate knowledge and experience, combined with an impatient urgency to make it big and a lack of respect for market forces, easily lead to misuse of leverage and position sizing.

Trading carries risk - it is based on risk-taking. But the risk involved can be quantified, managed and contained within acceptable limits - if and when the trader has learnt their business.

Nice theory. And seen this posted about many times. Seen it in practice too. Doesn’t make one iota of a difference to somebody who is over trading. When they start seeing that they’re getting close to a margin call you’d be surprised the speed at which they’re able to grab that credit or debit card and punch the numbers in. Ask me how I know!!! LOL!!!

In the end, it all boils down to how much control you have. High or low leverage, the level of risk lies within your itchy fingers.

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