Hello traders,
one of most common used "rules" of trading is that "high leverage will kill you".
But when I think about it I'm not so convinced that is true. I look on leverage as a tool that broker provides you and one should use it as a tool.
Some simple explanation on how I look on high leverage:
Let's say that I have 10k budget for trading.
Option 1 is to load all 10k on my account and use for example 1:100 leverage. If then I want to open a position with 1 lot then margin requirements are 1k and if things really go bad i will have a stop out when i have just 300€ on my account (30% of margin=stop out). So at the end I lost 9.700 €.
Of course I could have some risk management rules to set my maximum loss when 20% of the account is lost - that means I lost 2k and have 8k left on my account at the end of that trade.
Option 2 if I use 1:500 leverage, then for 1 lot I need 200€ margin. So I dont have to load 10k, but only 2k on my trading account. And again if things go really bad after stop out I have left cca. 65€ (30% of margin).
So, with option 1 I lose at least 2.000€ (or even 9.700€ if I let it run). And with a balance still at 8k I am wery likely to do some stupid revenge trade or something which probably fucks me up some more. You know that happens
With option 2 I lost 1.935€. I still have a chance for a revenge trade for that 65€ but that is it. Then I have to load my account again (takes time - opportunity to calm down and analyze). And I can do that 5 times with a 10k budget.
Also it is better for me to have my money in the bank if I dont really need it for trading (talking about that 8k).
Risk management for me is better if I have 2.000 account (and stop out is the final limit) than to have 10.000 on my account (and 20% of balance is my final limit).
The only better thing would be not to use leverage at all. But then you need a lot more than a 10k budget.
Please comment and explain your wiew! Maybe I'm missing something important in my calculations.
Happy trading
one of most common used "rules" of trading is that "high leverage will kill you".
But when I think about it I'm not so convinced that is true. I look on leverage as a tool that broker provides you and one should use it as a tool.
Some simple explanation on how I look on high leverage:
Let's say that I have 10k budget for trading.
Option 1 is to load all 10k on my account and use for example 1:100 leverage. If then I want to open a position with 1 lot then margin requirements are 1k and if things really go bad i will have a stop out when i have just 300€ on my account (30% of margin=stop out). So at the end I lost 9.700 €.
Of course I could have some risk management rules to set my maximum loss when 20% of the account is lost - that means I lost 2k and have 8k left on my account at the end of that trade.
Option 2 if I use 1:500 leverage, then for 1 lot I need 200€ margin. So I dont have to load 10k, but only 2k on my trading account. And again if things go really bad after stop out I have left cca. 65€ (30% of margin).
So, with option 1 I lose at least 2.000€ (or even 9.700€ if I let it run). And with a balance still at 8k I am wery likely to do some stupid revenge trade or something which probably fucks me up some more. You know that happens
With option 2 I lost 1.935€. I still have a chance for a revenge trade for that 65€ but that is it. Then I have to load my account again (takes time - opportunity to calm down and analyze). And I can do that 5 times with a 10k budget.
Also it is better for me to have my money in the bank if I dont really need it for trading (talking about that 8k).
Risk management for me is better if I have 2.000 account (and stop out is the final limit) than to have 10.000 on my account (and 20% of balance is my final limit).
The only better thing would be not to use leverage at all. But then you need a lot more than a 10k budget.
Please comment and explain your wiew! Maybe I'm missing something important in my calculations.
Happy trading