{"id":10005,"date":"2022-10-14T07:24:39","date_gmt":"2022-10-14T07:24:39","guid":{"rendered":"https:\/\/mdr.foobrdigital.com\/?p=10005"},"modified":"2022-10-14T07:24:39","modified_gmt":"2022-10-14T07:24:39","slug":"low-leverage-allows-new-forex-traders-to-survive","status":"publish","type":"post","link":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/2022\/10\/14\/low-leverage-allows-new-forex-traders-to-survive\/","title":{"rendered":"Low Leverage Allows New Forex Traders To Survive"},"content":{"rendered":"\n

As a trader, it is crucial<\/strong> that you understand both the benefits AND the pitfalls of trading with leverage.<\/p>\n\n\n\n

Using a ratio of 100:1<\/strong> as an example means that it is possible to enter into a trade for up to $100 for every $1<\/strong> in your account.<\/p>\n\n\n\n

With as little as $1,000 of margin available in your account, you can trade up to $100,000 at 100:1 leverage.<\/p>\n\n\n\n

This gives you the potential to earn profits on the equivalent of a $100,000 trade!<\/p>\n\n\n\n

It\u2019s like a super scrawny dude who has a super long forearm entering an arm-wrestling match.<\/p>\n\n\n\n

If he knows what he\u2019s doing, it doesn\u2019t matter if his opponent is Arnold Schwarzenegger, due to the leverage that his forearm can generate, he\u2019ll usually come out on top.<\/p>\n\n\n\n

\"Leverage\"<\/figure>\n\n\n\n

When leverage works, it magnifies your gains substantially. Your head gets BIG and you think you\u2019re the greatest trader that has ever lived.<\/p>\n\n\n\n

But leverage can also work against you<\/strong>.<\/p>\n\n\n\n

If your trade moves in the opposite direction, leverage will AMPLIFY your potential losses.<\/p>\n\n\n\n

You\u2019ll be broke faster than Mike Tyson can chew your ear off.<\/p>\n\n\n\n

Here\u2019s a chart of how much your account balance changes if prices move depending on your leverage.<\/p>\n\n\n\n

LEVERAGE<\/th>% CHANGE IN CURRENCY PAIR<\/th>% CHANGE IN ACCOUNT<\/th><\/tr>
100:1<\/strong><\/td>1%<\/td>100%<\/td><\/tr>
50:1<\/strong><\/td>1%<\/td>50%<\/td><\/tr>
33:1<\/strong><\/td>1%<\/td>33%<\/td><\/tr>
20:1<\/strong><\/td>1%<\/td>20%<\/td><\/tr>
10:1<\/strong><\/td>1%<\/td>10%<\/td><\/tr>
5:1<\/strong><\/td>1%<\/td>5%<\/td><\/tr>
3:1<\/strong><\/td>1%<\/td>3%<\/td><\/tr>
1:1<\/strong><\/td>1%<\/td>1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Let\u2019s say you bought USD\/JPY and it goes up by 1% from 120.00 to 121.20.<\/p>\n\n\n\n

If you trade one standard 100k lot, here is how leverage would affect your return:<\/p>\n\n\n\n

LEVERAGE<\/th>MARGIN REQUIRED<\/th>% CHANGE IN ACCOUNT<\/th><\/tr>
100:1<\/strong><\/td>$1,000<\/td>+100%<\/td><\/tr>
50:1<\/strong><\/td>$2,000<\/td>+50%<\/td><\/tr>
33:1<\/strong><\/td>$3,000<\/td>+33%<\/td><\/tr>
20:1<\/strong><\/td>$5,000<\/td>+20%<\/td><\/tr>
10:1<\/strong><\/td>$10,000<\/td>+10%<\/td><\/tr>
5:1<\/strong><\/td>$20,000<\/td>+5%<\/td><\/tr>
3:1<\/strong><\/td>$33,000<\/td>+3%<\/td><\/tr>
1:1<\/strong><\/td>$100,000<\/td>+1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Let\u2019s say you bought USD\/JPY and it goes down by 1% from 120.00 to 118.80.<\/p>\n\n\n\n

If you trade one standard 100k lot, here is how leverage would affect your return (or loss):<\/p>\n\n\n\n

LEVERAGE<\/th>MARGIN REQUIRED<\/th>% CHANGE IN ACCOUNT<\/th><\/tr>
100:1<\/strong><\/td>$1,000<\/td>-100%<\/td><\/tr>
50:1<\/strong><\/td>$2,000<\/td>-50%<\/td><\/tr>
33:1<\/strong><\/td>$3,000<\/td>-33%<\/td><\/tr>
20:1<\/strong><\/td>$5,000<\/td>-20%<\/td><\/tr>
10:1<\/strong><\/td>$10,000<\/td>-10%<\/td><\/tr>
5:1<\/strong><\/td>$20,000<\/td>-5%<\/td><\/tr>
3:1<\/strong><\/td>$33,000<\/td>-3%<\/td><\/tr>
1:1<\/strong><\/td>$100,000<\/td>-1%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

The more leverage you use, the less \u201cbreathing room\u201d you have for the market to move before a margin call.<\/strong><\/p>\n\n\n\n

You\u2019re probably thinking, \u201cI\u2019m a\u00a0day trader, I don\u2019t need no stinkin\u2019 breathing room. I only use 20-30 pip stop losses.\u201d<\/p>\n\n\n\n

Okay, let\u2019s take a look:<\/p>\n\n\n\n

Example #1<\/h2>\n\n\n\n

You open a mini account with $500 which trades 10k mini lots and only requires a .5% margin.<\/p>\n\n\n\n

You buy 2 mini lots of EUR\/USD.<\/p>\n\n\n\n

Your true leverage is 40:1<\/strong> ($20,000 \/ $500).<\/p>\n\n\n\n

You place a 30-pip stop loss and it gets triggered. Your loss is $60<\/strong> ($1\/pip x 2 lots).<\/p>\n\n\n\n

You\u2019ve just lost 12% of your account<\/strong> ($60 loss \/ $500 account).<\/p>\n\n\n\n

Your account balance is now $440<\/strong>.<\/p>\n\n\n\n

You believe you just had a bad day. The next day, you\u2019re feeling good and want to recoup yesterday\u2019s losses, so you decide to double up and you buy 4 mini lots of EUR\/USD.<\/p>\n\n\n\n

Your true leverage is about 90:1<\/strong> ($40,000 \/ $440).<\/p>\n\n\n\n

You set your usual 30-pip stop loss and your trade losses.<\/p>\n\n\n\n

Your loss is $120<\/strong> ($1\/pip x 4 lots).<\/p>\n\n\n\n

You\u2019ve just lost 27% of your account<\/strong> ($120 loss\/ $440 account).<\/p>\n\n\n\n

Your account balance is now $320.<\/strong><\/p>\n\n\n\n

You believe the tide will turn so you trade again.<\/p>\n\n\n\n

You buy 2 mini lots of EUR\/USD. Your true leverage is about 63:1<\/strong>.<\/p>\n\n\n\n

You set your usual 30 pip stop loss and lose once again! Your loss is $60<\/strong> ($1\/pip x 2 lots).<\/p>\n\n\n\n

You\u2019ve just lost almost 19% of your account<\/strong> ($60 loss \/ $320 account). Your account balance is now $260.<\/p>\n\n\n\n

You\u2019re getting frustrated. You try to think about what you\u2019re doing wrong. You think you\u2019re setting your stops too tight.<\/p>\n\n\n\n

The next day you buy 3 mini lots of EUR\/USD.<\/p>\n\n\n\n

Your true leverage is 115:1 (<\/strong>$30,000 \/ $260).<\/p>\n\n\n\n

You loosen your stop loss<\/strong> to 50 pips. The trade starts going against you and it looks like you\u2019re about to get stopped out yet again!<\/p>\n\n\n\n

But what happens next is even worse!<\/p>\n\n\n\n

You get a margin call!<\/strong><\/p>\n\n\n\n

\"Margin<\/figure>\n\n\n\n

Since you opened 3 lots with a $260<\/strong> account, your Used Margin was $150<\/strong> so your Usable Margin was a measly $110<\/strong>.<\/p>\n\n\n\n

The trade went against you 37 pips and because you had 3 lots opened, you get a margin call. Your position has been liquidated at market price.<\/p>\n\n\n\n

The only money you have left in your account is $150<\/strong>, the Used Margin that was returned to you after the margin call.<\/p>\n\n\n\n

After four total trades, your trading account has gone from $500 to $150<\/strong>.<\/p>\n\n\n\n

A 70% loss<\/strong>!<\/p>\n\n\n\n

Congratulations, it won\u2019t be very long until you lose the rest.<\/p>\n\n\n\n

TRADE #<\/th>STARTING ACCOUNT BALANCE<\/th># LOTS OF USED<\/th>STOP LOSS (PIPS)<\/th>TRADE RESULT<\/th>ENDING ACCOUNT BALANCE<\/th><\/tr>
1<\/strong><\/td>$500<\/td>2<\/td>30<\/td>-$60<\/td>$440<\/td><\/tr>
2<\/strong><\/td>$440<\/td>4<\/td>30<\/td>-$120<\/td>$320<\/td><\/tr>
3<\/strong><\/td>$320<\/td>2<\/td>30<\/td>-$60<\/td>$260<\/td><\/tr>
4<\/strong><\/td>$260<\/td>3<\/td>50<\/td>Margin Call<\/td>$150<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

A four-trade losing streak is not uncommon. Experienced traders have similar or even longer streaks.<\/p>\n\n\n\n

The reason they\u2019re successful is that they use low leverage<\/strong>.<\/p>\n\n\n\n

Most cap their leverage at 5:1 but rarely go that high and stay around 3:1.<\/strong><\/p>\n\n\n\n

The other reason experienced traders succeed is that their accounts are properly capitalized<\/a>!<\/p>\n\n\n\n

While learning\u00a0technical analysis,\u00a0fundamental analysis,\u00a0sentiment analysis,\u00a0building a system,\u00a0trading psychology\u00a0are important, we believe the biggest factor on whether you succeed as a forex trader is making sure you\u00a0capitalize your account sufficiently and trade that capital with smart leverage<\/strong>.<\/p>\n\n\n\n

Your chances of becoming successful are greatly reduced below a minimum starting capital. It becomes impossible to mitigate the effects of leverage on too small an account.<\/p>\n\n\n\n

Low leverage with proper capitalization allows you to realize losses that are very small which not only lets you sleep at night<\/strong>, but allows you to trade another day<\/strong>.<\/p>\n\n\n\n

Example #2<\/h2>\n\n\n\n

Bill opens a $5,000 account trading 100k lots. He is trading with 20:1<\/strong> leverage.<\/p>\n\n\n\n

The currency pairs that he normally trades move anywhere from 70 to 200 pips on a daily basis. In order to protect himself, he uses tight 30 pip stops.<\/p>\n\n\n\n

If prices go 30 pips against him, he will be stopped out for a loss of $300.00. Bill feels that 30 pips are reasonable but he underestimates how volatile the market is and finds himself being stopped out frequently.<\/p>\n\n\n\n

After being stopped out four times, Bill has had enough. He decides to give himself a little more room, handle the swings, and increases his stop to 100 pips.<\/p>\n\n\n\n

Bill\u2019s leverage is no longer 20:1. His account is down to $3,800 (because of his four losses at $300 each) and he\u2019s still trading one 100k lot.<\/p>\n\n\n\n

His leverage is now over 26:1<\/strong>.<\/p>\n\n\n\n

He decides to tighten his stops to 50 pips. He opens another trade using two lots and two hours later his 50 pip stop loss is hit and he losses $1,000.<\/p>\n\n\n\n

He now has $2,800 in his account. His leverage is over 35:1<\/strong>.<\/p>\n\n\n\n

He tries again with two lots. This time the market goes up 10 pips. He cashes out with a $200 profit. His account grows slightly to $3,000.<\/p>\n\n\n\n

He opens another position with two lots. The market drops 50 points and he gets out. Now he has $2,000 left.<\/p>\n\n\n\n

He thinks \u201cWhat the hell?!\u201d and opens another position!<\/p>\n\n\n\n

The market proceeds to drop another 100 pips.<\/p>\n\n\n\n

Because he has $1,000 locked up as margin deposit, he only has $1,000 margin available, so he receives a margin call and his position is instantly liquidated!<\/p>\n\n\n\n

<\/div>\n\n\n\n

He now has $1,000 left which is not even enough to open a new position.<\/p>\n\n\n\n

He lost $4,000 or 80% of his account with a total of 8 trades and the market has only moved 280 pips. 280 pips! The market moves 280 pips pretty darn easy.<\/p>\n\n\n\n

Are you starting to see why leverage is the top killer of\u00a0forex\u00a0traders?<\/p>\n\n\n\n

As a new trader, you should consider limiting your \nleverage to a maximum of\u00a010:1<\/strong>. Or to be really safe,\u00a0\n1:1<\/strong>.\u00a0Trading with too high a leverage ratio is one of <\/strong>\nthe most common errors made by new forex traders<\/strong>. \nUntil you become more experienced, we strongly\n recommend that you trade with a lower ratio.<\/code><\/pre>\n\n\n\n
\"Forex<\/figure>\n\n\n\n
<\/p>\n","protected":false},"excerpt":{"rendered":"
As a trader, it is crucial that you understand both the benefits AND the pitfalls of trading with leverage. Using a ratio of 100:1 as an example means that it is possible to enter into a trade for up to $100 for every $1 in your account. With as little as $1,000 of margin available in your account, you can trade up to […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[814],"tags":[],"_links":{"self":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/10005"}],"collection":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/comments?post=10005"}],"version-history":[{"count":0,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/posts\/10005\/revisions"}],"wp:attachment":[{"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/media?parent=10005"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/categories?post=10005"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mudassirbackup.infinitycodestudio.com\/index.php\/wp-json\/wp\/v2\/tags?post=10005"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}