Low leverage is dangerous, why?

LOW leverage is in fact dangerous. Why I am saying that?
It is simple - to get the same profit you need to invest and thus risk more money.
Lets say you want to trade 1 lot of EURUSD with SL/TP=100 pips.
With leverage of 1:3 you need 100000*1.12/3= $37,000 to cover the margin so you have to have account of $40,000 to trade 1 lot.
You are risking these $40,000 as anything could happen.

With leverage of 1:500 you need 100000*1.12/500= $224 to cover the margin so you have to have account of $1000 to trade 1 lot.
You get the same profit or loss on both accounts for trading 1 lot. Lets say profit of $100.
For 40k account it is just 0.25%
For 1k account it is 10%.

So it is much better to have 40 accounts of 1k with high leverage and diversified portfolio of broker/pairs/strategies than having one 40k account.

Interesting... However, any form of leveraging can be dangerous if you have no clue how to apply proper risk management on your portfolio. High leverage (e.g. more than 200) is very dangerous to NEW traders, who tend to place more trades (because each trade requires less margin). New traders also are less disciplined in using correct stop-loss and take-profit levels, which could result in holding onto multiple high-leveraged losing trades for too long, resulting in blown accounts very quickly.

I think you have a valid point if you are an experienced trader with a solid proven trading system. It makes sense to use high-leveraged accounts when a proven risk management strategy is applied.

But I would not advise any new trader to open a high leverage account (e.g. 1:500) on their first attempt at trading, while they are still very inexperienced in terms of risk and money management, solid technical and fundamental analysis as well as being able to handle the emotional stress associated with trading, especially manual trading.

Anyway, very interesting post indeed! 😄

JacoAF posted:
Interesting... However, any form of leveraging can be dangerous if you have no clue how to apply proper risk management on your portfolio. High leverage (e.g. more than 200) is very dangerous to NEW traders, who tend to place more trades (because each trade requires less margin). New traders also are less disciplined in using correct stop-loss and take-profit levels, which could result in holding onto multiple high-leveraged losing trades for too long, resulting in blown accounts very quickly.

I think you have a valid point if you are an experienced trader with a solid proven trading system. It makes sense to use high-leveraged accounts when a proven risk management strategy is applied.

But I would not advise any new trader to open a high leverage account (e.g. 1:500) on their first attempt at trading, while they are still very inexperienced in terms of risk and money management, solid technical and fundamental analysis as well as being able to handle the emotional stress associated with trading, especially manual trading.

Anyway, very interesting post indeed! 😄

Well even newbie trader could work with high leverage using fixed stop losses and lets say max XXX trades od size of YYY on account of ZZZ balance. Well ANY even newbie trader should have trading plan including position sizing based on leverage:)

I agree with you

***When I posted I could only see the first post.

Newbies should still understand leverage, it is relevant and I don't know who would start trading with real money and not understand what leverage is. It's mentioned everywhere, and it's self explanatory...

Magiic posted:
***When I posted I could only see the first post.

Newbies should still understand leverage, it is relevant and I don't know who would start trading with real money and not understand what leverage is. It's mentioned everywhere, and it's self explanatory...

People often misunderstand leverage as sort of emergency stop loss. It is not.
Margin is actually limiting your position size. Stop loss (and take profit) are completely different instruments.

great points !!

Interest topic

But i think .....


with no leverage or less leverage


You not need to Stop loss any way

Low leverage is dangerous but advantageous as well. If it adds to profits , it adds to losses as well. You need money to make money. Leverage is like adding additional money to your account which let you trade more. Leverage gives big profit with small investment .Also leverage and profits are nowhere related. Higher the leverage ,lower will be the margin required to place a trade. So if leverage will be low, the margin requirement would be high and more money would be at stake.

Hi Janeo,

I just like to correct something...

Leverage has nothing to do directly with how much profit you make. For example, open two demo accounts, one with 1:50 leverage, and one with 1:500 leverage. Now place a single 1 standard lot trade on each of the accounts, with both a 10 pip stop-loss and 10 pip take-profit. You will see that both accounts will make exactly the same profit or loss.

High-leverage is definitely dangerous when you over expose yourself. By this I mean, because high leverage require only a small amount of your available free-margin, traders tend to place too many trades. Yes you can make money quicker if you place many trades, but you can also loose money just as quick.

Another experiment you can do is this. Use the same two accounts, and place as many trades as you have free margin in the account. So use up all available free margin. And try and place all trades in the wrong direction. The idea is to see which account will last longer. I can guarantee you the low leverage account will last much longer than the high leverage account.

The point is this, new traders tend to gravitate towards high leverage accounts, because they can place more trades and in theory make more money. Inexperienced traders will either place too many trades and will take too many losses from the market hitting the stop loss. Eventually they will stop using stop-losses and what usually happens is they will start with one trade, lets say a buy. Markets turns against them, and they wait for that 'bottom' and place another buy, because the market will turn higher and they will make their money back or average out. This starts an emotion and psychological 'war' within themselves. They keep buying, because they are certain the market will turn soon. They get angry with the market and keep placing buys, sometimes even doubling up. The more emotional they get, the more mistakes they make, the more angry or scared they get. Soon they take HUGE losses or even wipe out their accounts.

This sounds silly, but new inexperienced traders do this every single day. I'm not saying someone with 5 or 10 years trading experience will do this sort of thing, but high leverage is inherently dangerous to new and inexperienced traders. I would not recommend leverage higher than 1:100 for new traders, preferably if you have enough capital to invest, rather open a 1:50 account.

clessm posted:
Interest topic

But i think .....


with no leverage or less leverage


You not need to Stop loss any way

So what would you do in your expert opinion if you sit with an open trade or trades and the market jumps 1800 pips against you like with Brexit on the GBPUSD?.... with no stop-loss?.... on any leverage account.... especialy a leverage of 1:100, 1:200 or worse 1:500?

I'll tell you what you do.... you go and open a new account (hopefully you did not use your home-loan money.... cause then you are in deep sh*t) or deposit new money..... cause your account went 'bye-bye'.... your account 'has left the building'.... your account 'is pushing up daisies'.... your account has 'ceased to exist'.... your account is DEAD!!!

With all due respect sir 😄, that's not good advice for new traders....

Totally disagree.
With the leverage of 200, the 0.5% change of currancy pair will go you to the whole LOSS.

I recommend all my friends the leverage not more than 50.

JacoAF posted:

clessm posted:
Interest topic

But i think .....


with no leverage or less leverage


You not need to Stop loss any way

So what would you do in your expert opinion if you sit with an open trade or trades and the market jumps 1800 pips against you like with Brexit on the GBPUSD?.... with no stop-loss?.... on any leverage account.... especialy a leverage of 1:100, 1:200 or worse 1:500?

I'll tell you what you do.... you go and open a new account (hopefully you did not use your home-loan money.... cause then you are in deep sh*t) or deposit new money..... cause your account went 'bye-bye'.... your account 'has left the building'.... your account 'is pushing up daisies'.... your account has 'ceased to exist'.... your account is DEAD!!!

With all due respect sir 😄, that's not good advice for new traders....

Oh common who said no stop loss? You said no stop loss.

vontogr@.... as far as I can see I was quoting and responding to the post made by clessm....

With my solid fund management strategy, i don't care much about leverage there is no different between 1:1 or 1:1000. I am trading now 1:500 at FxPro. The more leverage, the more funds i can use even 1:100000. 😇

JacoAF posted:
vontogr@.... as far as I can see I was quoting and responding to the post made by clessm....

I am sorry I did not read his post.

So can we agree on statement that SL is indeed necessary?

togr posted:

JacoAF posted:
vontogr@.... as far as I can see I was quoting and responding to the post made by clessm....

I am sorry I did not read his post.

So can we agree on statement that SL is indeed necessary?

I absolutely agree. I hope I did not come across as doubting your considerable trading experience. I have a number of students on Myfxbook, and I teach them that a Stop-Loss, Take-Profit, Risk & Money Management as an absolute must for new traders. So most of my posts are aimed to explain to my students the importance of protecting their equity and managing risk while trading.

I will admit, experienced traders develop the ability to manage a trade without stop-losses to a certain extend, but that does not mean it is the correct thing to do as a trader, from the perspective of risk management. Maybe I'm just old fashioned, but I still follow my 7 year-old trading plan as best I could, and risk management forms a large part of it.

Anyway, I have seen your portfolio on MyFXBook, and I respect your views on trading. Wish you the best for the future.

JacoAF posted:
Hi Janeo,

I just like to correct something...

Leverage has nothing to do directly with how much profit you make. For example, open two demo accounts, one with 1:50 leverage, and one with 1:500 leverage. Now place a single 1 standard lot trade on each of the accounts, with both a 10 pip stop-loss and 10 pip take-profit. You will see that both accounts will make exactly the same profit or loss.

High-leverage is definitely dangerous when you over expose yourself. By this I mean, because high leverage require only a small amount of your available free-margin, traders tend to place too many trades. Yes you can make money quicker if you place many trades, but you can also loose money just as quick.

Another experiment you can do is this. Use the same two accounts, and place as many trades as you have free margin in the account. So use up all available free margin. And try and place all trades in the wrong direction. The idea is to see which account will last longer. I can guarantee you the low leverage account will last much longer than the high leverage account.

The point is this, new traders tend to gravitate towards high leverage accounts, because they can place more trades and in theory make more money. Inexperienced traders will either place too many trades and will take too many losses from the market hitting the stop loss. Eventually they will stop using stop-losses and what usually happens is they will start with one trade, lets say a buy. Markets turns against them, and they wait for that 'bottom' and place another buy, because the market will turn higher and they will make their money back or average out. This starts an emotion and psychological 'war' within themselves. They keep buying, because they are certain the market will turn soon. They get angry with the market and keep placing buys, sometimes even doubling up. The more emotional they get, the more mistakes they make, the more angry or scared they get. Soon they take HUGE losses or even wipe out their accounts.

This sounds silly, but new inexperienced traders do this every single day. I'm not saying someone with 5 or 10 years trading experience will do this sort of thing, but high leverage is inherently dangerous to new and inexperienced traders. I would not recommend leverage higher than 1:100 for new traders, preferably if you have enough capital to invest, rather open a 1:50 account.

Leverage has nothing to do directly with how much profit you make. For example, open two demo accounts, one with 1:50 leverage, and one with 1:500 leverage. Now place a single 1 standard lot trade on each of the accounts, with both a 10 pip stop-loss and 10 pip take-profit. You will see that both accounts will make exactly the same profit or loss.

That is not true actually. With higher leverage you can open 1 lot trade on 1000 account and make e.g. $100 profit
With low leverage you can open just 0.1 trade on 1000 account and make just $10 profit.

togr posted:
LOW leverage is in fact dangerous. WTF I am saying that?
It is simple - to get the same profit you need to invest and thus risk more money.

This is one side of the story. The other is that you simply need to be more patient and wait for longer to get the same profit with the same investment. This I see already mentioned in the latest posts of the discussion.
Patience pays off in the end as you mitigate your risk and keeping exposure to adverse price movements limited.
Relying on Stop Losses could be also very dangerous as there are moments when there is lack of liquidity and the next price can be way outside your stop loss - this will wipe your account completely, especially if the leverage is high. If trading with a broker that trades against you, your (stop) loss is actually the profit of the broker.
You gave a good overview of the low/high leverage scenario so I just wanted to add these points for consideration 😄