Could Leverage Wipe Out My Account?

Hello,

I only trade on practice account, so my words are rather questions than statements. I am a complete noob... This is my knowledge about Leverage and Margin and before I go trading a Real Account I would like the professionals to point out my shortcomings and mistakes. Thank you very much.

Whether High Leverage could wipe out your account or not will depend on the SIZE of your Account, relative to your Position Size and Leverage. Let’s say you have an Account size of $2000 and you want to trade a Mini Lot (10,000 units of base currency). Trading a Mini Lot means that in the case of EUR/USD you want to buy 10,000 Euros with the amount of USD that's current. So, you ask for 1:400 leverage, which is around $25 margin (10,000 / 400), depending on the actual currency rate, as I mentioned. As part of your Risk Management you have to add the spread and the commission to the margin. This will be most likely more than $30. If the market turns against you, then this is ALL the money you can lose (this, I assume, is plain wrong), because the moment this money disappears from your Margin, the broker will stop you out. There will be still $1,970 remaining in your account (here I am most probably wrong - help please). However, by losing $30 you lost more than 1% of your account. The ideal would be to risk UP to 1%. Some big traders like David Paul only risk 0.5% of their account.

Now, if you want to trade a Standard Lot with $2000 account and ask for the same Leverage, then the Margin will jump up to $250. If you want to trade 3 Standard Lots, then this will be $750 plus commission and spread. So, if you’ll get stopped out, then you’ll lose $750 dollars, plus the spread and commission, which is about 40% of your account (this also, I assume, is completely wrong - help please). You make another move like this and you are more or less out. This is where sound Risk and Money management steps in. Also, technical analysis, optimal entries/exits, optimal Stop Loss/Profit Target, Trailing Stop, PATIENCE, fore-testing/back-testing and keeping a Spreadsheet where your win%, average profit, drawdown, profit margin, payoff ratio, profit factor, expectancy, success rate, SQN, Average R, and Total R, etc. will help you to have a better trade. It's my experience that keeping track of these help me to make better trades - at least on my DEMO account.

What else is needed to be understood about High Leverage is that it comes with Low Margin. Low Margin leaves tight room for error. For example, $25 margin leaves almost no room for error and in a Highly Volatile Market Hours (especially beginning/ending of the weak, opening/closing hours) this amount will be taken out in no time. That is why, before entering a trade you will have to learn about your Trading Environment. In other words, Volatility has to be considered and in accordance with Volatility and Account Size you will ask for Optimal Leverage. You can practice this on a DEMO Account and later on a Real Account, but starting out with Micro Lots.

What you might not know about Margin is that it is the Money that you trade with. So, by asking for Leverage a portion of your Account is placed into the Margin that will be engaged in trading. It's not your whole Account that you are trading with in case of having a Leverage.

Another thing. Low Leverage can also wipe out your account. Consider this. If you have a $2000 Account size and want to trade a Mini Lot with 1:10 leverage, then your Margin will jump up to $1000. This means that if the Market turns against you and you keep hoping for a better trade without any rational prospects, then you will easily lose this $1000. So, basically it ALL comes down to sound Money and Risk Management – not High Leverage. If it is clear to you how much you Risk and how much Margin you get, and how Volatile the market is, and what Strategies to use in Trending vs Breakout vs Ranging Market, then you’ll be fine, because you will not make an erroneous move out of ignorance and greed.

Yet, another thing to consider. Don't open an Account with a broker unless you are absolutely certain about the size of the Positions you want to trade, the max/min Margin you are willing to have, therefore the Leverage you want to ask for. This will determine your Account Size. At least, this is how I would personally do it, because I would not trust ALL my money with the broker. They are hardly any decent brokers, at least this is what my research shows. So I would aim at the OPTIMAL amount of money that I would deposit with him and the rest I would keep in my bank.

There are two good posts that I know of to read about Balance, Equity, Margin, Free Margin, Margin level:

1)The first is from mrkam (2nd post) on this page:https://www.forexfactory.com/showthr...755&page=1&rep
2) The second is from Jexter (2nd post) on this page: https://www.forexfactory.com/showthread.php?t=459141

Once again, I am a new to Forex, and I only trade on DEMO account. I would like to be corrected if there is anything wrong with my understanding of Leverage. All good answers/corrections are appreciated and very welcome. Also, if nothing else, rookies can learn from the mistakes I made in this article, especially about money at risk on leverage. I marked the places I suspect to be wrong.

Thank you very much in advance.

In short, yes. Keep an eye on the relative size of your position and stay safe!

Hi, been trading live for a while and a good study could be https://www.babypips.com/learn/forex/leverage-defined.

IMO while learning, stay on as small as possible lots, you should be OK then.
I get what you are saying about leverage and it basically comes down to start small.
Surviving is most definitely key when starting out but I believe any business's first couple of years are about surviving.
As you said, risk and money management.
Green pips

Hello guys,

Thank you for your reply katieh and Go.b!

attim

You're not really a complete noob at all, because you have some basic knowledges about it, not like those noob people. If you're really new at trading, it's always advisable to start with small but never trade that you cannot afford to lose unless you have traveled a long road of Forex.
Have a great journey ahead @AttiM.

From all trading elements leverage contains huge risk , that’s why by means of trading tool most of the time we fall a great trouble particularly when our risk management doesn’t work , for newcomers it is more appropriate to use small leverage ratio for avoiding unfortunate losses, but they can use high leverage in demo to see the performance how it works.

high leverage always causes high risk but if you know how to manage risk with real trading plan , there is a chance to get good profit by using leverage.

Yes, high leverage can surely wipe out your account if you don't know how to manage your risk properly. but don't forget it can also magnify your profits so use it wisely.

Good point; actually trading with a high trading leverage without proper plan would be costly. It’s my personal experience I started with 1:500 but now it’s only 1:100.

Hi leverage cannot wipe your account,if you strictly follow good money management.
Leverage is only amount of money,that broker hold to keep your position open.
If you risk eg 3% of your account and you strictly cut your loses,high leverage cannot wipe your account.
Only you can wipe your account,poor trading skills,poor money management, etc etc,

High Leverage does not wipe your account.Yes , it is fruitful if you are very careful in terms of managing your trades / money management / risk assessment.

I switched recently to 1:200 from 1:500, i am happy now and it stops me from overtrading and i watch my free levels/ lot size / open positions count carefully. Heck, i might go down to 1:100 in future or lower.

What difference does it make for you,if you know what you doing and don't have gambling tendencies?
By lowering your leverage you actually leaving more of your capital with broker,then is necessary.

Thank you KevinMarsh, and everybody.

if you are a scalper high leverage is better. deposit only a required amount. so no need to use stop loss also you will be more alert because every tick means higher percentage of your money

If you are using high leverage then it is suggested to have a proper risk management plan otherwise it could be fatal for your capital.

considering you are a noob (as you so call yourself) and are still trading on demo account I'd say you have picked up enough about the concept of leverage and risk. So yeah you'e right, the main thing with leverage is to understand it and its associated risks, whether you'll be able to handle it effectively or not. Herein lies the most important factor - your ability to employ an intelligent risk management plan.

I'm a newb too but.


I don't know how your broker works but mine doesn't set a stop loss at the bottom of the used margin automatically and if I did what you are talking about I would end up getting a margin call. A margin call comes when your account equity falls below the maintenance margin, you have to set a stop loss or you could lose 80% or 90% of your equity on any one trade depending on where your broker sets the maintenance margin.

If you are not aiming for small and consistent gains you are a gambler not a speculator and you will be among the 75% of new traders that get (repeatedly) wiped out.

I'm in Australia and I don't have much spare time so I trade on the daily charts Tuesdays to Saturdays because I can put in two hours every morning before breakfast and not worry about it the rest of the time. I never trade above 20:1, I risk no more than 5% of my equity on any one trade and no more than 20% of my total equity at any one time and I facilitate this by adding up my stop losses. If I am trading on a daily chart and the average candle is 80 pips I will set my stop loss at 200 pips (2.5 candles). If I have $2,000 in the base currency 5% is $100 and for a stop loss of 200 pips that would mean taking a position of $100/0.02 ($100/200 pips) which equals $5,000 so I'd scale in and out of that position with five micro lots. My position would take 5% out of my maximum 20% total risk so I would commit 25% of my capital (5/20) and trade $500 at 10:1. Note that I always round these figures down so as to trade below my maximums.

Your leverage doesn't need to be massive if you use your risk management strategy to calculate it. Given my parameters you will rarely want to go above 20:1 unless you are scalping on four screens and if you are only risking 1% of you capital per trade and a maximum of 10% of your capital total (which is far more prudent) you will rarely want to go above 5:1 and the possibility of going in at more than 10:1 is almost inconceivable.

I recommend you read "Forex For Beginners" by Anna Coulling, it was by far the best Forex book I read before I got started and my risk management strategy was lifted strait out of it.

Forget about trading at 400:1, anything above 50:1 is for chumps.

Hi altleftshift,

In my eyes, MARGIN CALL is not such a terrible thing - if we are sound money managers. If the Leverage we ask for is CONSISTENT with the money we intend to risk, then margin Call will become like a Secondary Stop Loss. Doesn’t it? The way I understand it, it’s not High Leverage that puts traders at risk, but decisions that LACK the understanding of markets and money management. However, leverage is a double edged sword – those who use it unwisely will be wiped out. The calculations of Leverage and Margin and technicalities are in my very first post, as you know. This comment is more of philosophical nature.

Leverage and Margin seems to me as an OPPORTUNITY, rather than a threat, if it is taken rationally. This approach, I feel, endows me with a kind of FLEXIBILITY that could not be attained by just following rigid rules. I believe RATIONALITY though is not the strength of people, that’s why 80 or even 90% of them lose their money – not because High leverage is bad.

As follows, I would never say what amount Leverage NEEDS or NEEDS NOT to be, because it would depend on account size and market conditions, thus it could be anything from 2:1 to 400:1 or more. This brings me to say that only those are CHUMPS who misuse High Leverage – not those who use it to their advantage, wisely. Traders are their OWN greatest enemies – not markets, brokers or leverages. I guess, to each his own. But, because I am not a trader yet, it is reasonable to assume that my thinking will be shaped by experience or perhaps even changed. My future will be told by my successes and failures.

I don’t treat High Leverage as a GET-RICH-QUICK money. Rather I treat it as an opportunity that allows me to take advantage of SHORTER, but confident market conditions. I think if the ODDS are on my side, then it would be IRRATIONAL from me to not to ask for more leverage. As WISE principles/rules ought to be, as BLIND sometimes they can become. Or is there some kind of an error in my thinking? I don't know. I think we need to refine our awareness of that fine line that separates a GOOD TRADE from financial SUICIDE. I am not a trader yet officially, but I also feel that Higher Leverage is not a good longer term trading idea.

TECHNICALITY in some sense is important, but not at the expense of intuition. But becoming too mechanical about trading, like when to enter/exit the market ALWAYS, what stop loss and leverage to use ALWAYS, and such, is a mistake, because it will push INTUITION in the background. This will only intensify fear and emotions. Also, it will make us become too PREDICTABLE that could be used against us by the industry - perhaps I am a bit PARANOID. Market assessment and numbers are important, but not as important as to take the place of PERCEPTION.

What I strive for, as a NOOB, is a market understanding that would allow me to enter the market with CONFIDENCE and conduct my trades with clarity and fluidity, without fear. I would like to be able to MOLD my trades according to market environments, almost like SCULPTING a clay-nude, because this will call for more creativity, or prompt actions if needed, which is free from anxiety, impatience and fear, naturally. And, my experience is that in many instances RIGID RULES are the result of FEAR rather than understanding. However, when I called FXTM, to my amazement, they told me that MOST, but not all, traders always use the same leverage. This suggests me a kind of paralyzed immobility that I suspect is characterized by fear.

It’s not arrogance that speaks from me, but stubbornness. And, I expect counter-arguments to be as powerful as my stubbornness, because they can always teach me something. I know, I shouldn’t be meddling with such knowledge unless it comes from experience. Perhaps I put the cart before the horse – let’s just hope that it won’t happen while I’ll trade.

Thanks you for your lengthy contribution and the info you provided me about your trading. I spent some time with your numbers and calculation.

A,

Leverage can not wipe the account. Poor risk/money management + bad trades can. Leverage itself is a tool. High leverage is like a sharp knife. If you are experienced hunter of course you want a sharp knife. If youre a baby you batter stick to rubber knife - low leverage.

Hi altleftshift,



Do you calculate the average size of candles by measuring the length of the last rally before your Entry, from rally bottom to rally high? So, it would be: height of rally in pips divided by the number of candles. For example, 900 pips high / 30 candles = 30 pips height in average.

P.S.
I got the book you suggested.

thanks in advance

A,