Say a broker has a 1:50 leverage. A standard lot size @ 100k would then cost me $2000 correct?
And 10k is $200? 250k is $5000? Why then do people say that you should have $25k per 100k standard lots that you trade?
Just curious.
It is because of the value of a pip when your trading that size: as a rule of thumb, at 1 standard lot (100k) the value of 1-pip is $10. Therefore if a trade goes 100-pips against you, all of a sudden you are $1000 down.
A large part of trading is protecting your capital so money management plays a massive part. Just because leverage allows you to buy a large position size compared to your account balance, it doesn’t mean that you should. Yes you could win big but you’ll also lose big & you can see your account disappear in a blink of an eye.
Decide on a acceptable loss per trade (eg. 1% or 2%) & then use the BabyPips position size calculator that’s in the Tools tab at the top of the page & buy the correct size. Under funded & over leveraged traders are greedy traders with ‘greed’ being a detrimental emotion when trading which will lead to errors & probably a loss overall.
baz raised some really good points. This is one of the traps laid out by many brokers to lure in new traders. Leverage is often misunderstood and used in the wrong way. I think leverage is a great tool if used properly and a devastating tool if used wrong. Having insufficient funds with high leverage may be one of the biggest mistakes new traders make. In the end it all comes down to risk management so if that combo works for you and your strategy don’t let others talk you out of it. There are many variables which go into the decision making process, but trading with insufficient trading capital is a death sentence in my opinion.
If there ONE thing all traders should have learned from Last Weeks Swiss Bank decision is that the only thing certain in the Forex Markets is “Uncertainty”
Its a real disservice by many brokers and guru types to entice new and aspiring traders with ridiculous amounts of leverage. If you want to survive for the long run, you gotta use leverage responsibly.
I think 5:1 is pushing it for me, cuz I have learned the hard way over the years.
Finally a WAKE up call that the forex market needed.