Is high leverage really bad for traders?

Quoting FXTerminator

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This "high-leverage-is-bad" myth is based on a simple confusion : most traders, newbies (and some pros alike!) assume that leverage means your total trading balance divided by the value of your position.

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Quoting FXTerminator

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In fact, if a trader has an excellent forex trading system, then the optimal course of action is to choose the highest leverage possible (400:1), while still keeping the % of trading balance allocated to each trade under 2% or less to allow for a fast compounding of profits.

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Quoting sergiu

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It seems that you trying really hard to make a name for yourself on this forum. You’ve been posting a lot lately and you are trying to show your vast knowledge in all trading related areas. However it is obvious that at times you are trying too hard. Normally I do not post much or engage in any discussions especially lately, but I feel compelled to reply to your post since I have a few problems with it.



First of all you are speaking with a lot of authority for a lot of traders. It is also funny that you set yourself above the professional traders. Even though they are professionals some of them still (in your opinion) do not understand and are confused about the simple concept of leverage. It cracks me up when someone comes on a public forum and makes all this claims about professional traders. But at least the claims usually are about how they trade and what tools they use. You took this one step further by pointing out the misconceptions they have about leverage.



The above statement contradicts itself and shows that you might actually be one confused about leverage. Here is why:

Lets say your
Account:10000$;
Risk: 2%;
So you can risk 200$.
Now let’s assume that your Stop Loss is 50 pips and that 1 pip=1$.
From this you position size is 4 Mini Lots or 40000$.
So for you to be able to take this position with the size of your account you would only need 4:1 leverage. Even if we assume that you would have ten positions opened in the same time with the same risk percentage you would only need 40:1 leverage and your total risk exposure would be 20% of your account – not a wise thing to do. So it seems that even with excessive risk you do not need leverage above 40:1. However you state that one should choose the highest possible leverage(400:1). Why? To me this is poor understanding of either leverage or risk management or maybe both.

Those high levels of leverage are usually offered by brokers that play against their clients. Because someone who does not understand money management will be able blow their account much faster with high leverage. And the faster they blow their account the faster the broker profits. Oanda for instance has their highest leverage at 50:1 and it never crossed my mind that this is a problem. Such “Low” leverage comes from a broker who tries to protect their clients.

So next time before you come and try to sound as such an expert take a couple of minutes and think. After all some newbie might actually believe that you are all that great and take your advice for granted. Maybe that is the reason most traders fail. They listen too much and think for themselves too little.

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Quoting kharvell

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Sergiu vs Terminator


Terminator


Sergiu


Me

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Quoting wallym

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To be honest, I'm confused as well with this leverage stuff. But here's how I view it. Please feel free to "bash" (read: educate) me up....

Say account of $250 trading 0.10 microlots ~ $0.10/pip of EURUSD.

With 10:1 leverage, you need a margin of ~ $133
With 200:1 leverage, you need a margin of ~ $6

Now, you opened a trade with 50pips SL. It was stopped out. That translates to a loss of $5 -- whichever leverage you're using.

I guess the dangerous part here is, if you're using 10:1 leverage, after opening 1 trade as per above, you will "only" now have a free margin of ~ $117. But using 200:1 leverage, you will still have a free margin of ~ $244. And because of this, the temptation to open up more trades is higher since your free margin is higher. And of course, more open trades means more risk.

I suppose bottomline is, no matter what leverage you're using, as long as you have the proper risk/money management you can stay in the game longer as you can imagine....

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Quoting sergiu

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. Here is why:

Lets say your
Account:10000$;
Risk: 2%;
So you can risk 200$.
Now let’s assume that your Stop Loss is 50 pips and that 1 pip=1$.
From this you position size is 4 Mini Lots or 40000$.
So for you to be able to take this position with the size of your account you would only need 4:1 leverage. Even if we assume that you would have ten positions opened in the same time with the same risk percentage you would only need 40:1 leverage and your total risk exposure would be 20% of your account – not a wise thing to do. So it seems that even with excessive risk you do not need leverage above 40:1. However you state that one should choose the highest possible leverage(400:1). Why? To me this is poor understanding of either leverage or risk management or maybe both.

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Quoting FXTerminator

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Let's say you are in a casino. You have found the perfect system and you can predict the outcome of each spin at the roulette table with 100% accuracy.

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Quoting FXTerminator

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Same thing with forex system but to a lesser degree. If your system is a super super perfomer, what is the optimal way of betting (trading)? Well since your system is extremely good and produces almost zero drawdown on each trade (in the worst case scenario each trade goes against you but only 3 to 5 pips before moving in your favor) your optimal course of action is to choose the maximum leverage possible and bet the maxium amount of money possible on each.
It would be foolish to bet otherwise.

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Quoting FXTerminator

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I am of of course assuming that your system is extremely, extremely good and that you have found such a beast, I am NOT encouraging anyone to trade like that, this is only a hypothetical example.
It's like a Sci-Fi movie, IF (and only IF) we have the perfect system, what leverage should we always use to milk to forex market?

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Quoting FXTerminator

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Please everyone, if you don't agree with something explain why, demonstrate, convince with some examples, that's the purpose of a forum.

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Quoting sergiu

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First you try to shatter the high leverage myth than you say that the situation where that would be a myth is in Sci-Fi movies. Next, you do not encourage anyone to trade like that in another words, consider the dangers of high leverage, a myth. Which one is it? Seems like another contradiction.

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Quoting FXTerminator

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The leverage we are discussing in this thread means the number of dollars you can control with X amount of money. If you open a position with $100 and you are now controlling $10,000 worth of currency, that's 100:1 leverage, REGARDLESS of your total trading balance.

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Quoting faure

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No, that's margin utilisation. You are using $100 of your margin to control $10 000 at a utilisation rate of 1:100. The above would mean nothing unless it is linked to your account balance. If your account balance is $10 000, that same mini-lot position would represent 1:1 leverage and the corresponding risk would be fairly low. If your account balance is $100 you are leveraged 1:100 and you could be facing a margin call pretty quickly. Your view of leverage has no use unless it's linked to an account balance. That's why the true definition of leverage exists.

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Quoting mrmikal

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F,

Your last 2 posts were...a little antagonistic

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Quoting mrmikal

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I knew this was discussed previously, and saw a few of your posts, but it didn't hit me as truth, until your last 2 posts for some reason.

I've been thinking along the same lines for a while, but I just didn't have the vocabulary to describe what I was thinking...thanks for helping me in that department.

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Quoting FXTerminator

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Here is a another typical trading myth: high leverage is bad for you! You see this idea in every futures/forex forums over and over again.

This is of course total nonsense and here is why.

Each time you open a 100 to 1 (or more) leverage position in a forex mini-account, your friendly forex dealer is simply saying this : "Hey Mr. Trader, just put $100 in your account plus cost of spread and I will let own $10,000 worth of currency, and if the market moves just 1% in your favor you make 100% profit on your margin money, less cost of spread and a possible small interest!"

so I guess if you have a 100K account with 100:1 leverage offered and you make $1000 dollars over the course of a year, you would say that you made 100% in that year - bravo - I can now tell my family that even though they are only up 15% for the year, they really are up 1500% on their "margin money". What is the use of that logic.

This "high-leverage-is-bad" myth is based on a simple confusion : most traders, newbies (and some pros alike!) assume that leverage means your total trading balance divided by the value of your position.

Actually it is your trading position divided by your balance. I can see why you are confused.

Your trading balance has of course NOTHING to do with leverage!

????

It does not matter if your trading balance is $1,000,000 or $100, if you open a position and you only need $50 to own/control $10,000 worth of currency then you are trading with a 200:1 leverage, period.

Remember this for later response highlighted in green

So high or low leverage, it does not matter. HOWEVER, what is really, really important is the percentage allocated to each trade. If you open a forex position and you need $5000 margin money and that margin money represents 100% of your trading balance then "Houston we've got a problem" indeed, no doubts about that.

In fact, if a trader has an excellent forex trading system, then the optimal course of action is to choose the highest leverage possible (400:1), to allow for a fast compounding of profits.

according to you in the earlier example you are trading with 200:1 leverage even though your account is 1,000,000 and you are trading 1 10K lot(meaning trading with leverage has nothing to do with account balance, according to you). If that is the case, then trading with 400: leverage wouldn't make a difference if your balance was 1,000,00 as well - you would still be trading 1 10K lot by this logic only your margin necessary per lot would be less. Either way you are trading 1 10k lot so how is 400:1 in this scenario compounding your profits any more. Do you now see the folly in your thinking.

PS: this thread is NOT an invitation to trade with higher/lower leverage, as always trade at your own risk.

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Quoting Leugimp

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Quoting faure

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No, that's margin utilisation. You are using $100 of your margin to control $10 000 at a utilisation rate of 1:100. The above would mean nothing unless it is linked to your account balance. If your account balance is $10 000, that same mini-lot position would represent 1:1 leverage and the corresponding risk would be fairly low. If your account balance is $100 you are leveraged 1:100 and you could be facing a margin call pretty quickly. Your view of leverage has no use unless it's linked to an account balance. That's why the true definition of leverage exists.

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Quoting FXTerminator

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So let's say I open a forex position with $100 (that's ALL I have in my account) and I now control $10,000 worth of currency. What is the leverage?

Right, 100:1

Now let's say I tell you this over a beer: "Hey Faure, you know what, I have $10,000 dollars just sitting and collecting dust in ANOTHER forex account with ANOTHER forex broker".

Now you mean to tell me that NOW my leverage is not 100:1 ANYMORE but 1:1 simply because I told you that I have $10,000 somewhere else ??? Come on! What if I tell you that I lied, that the $10,000 is in the cookie jar in my kitchen instead, am I still trading with 1:1 leverage according to you?

Leverage has NOTHING to do with your trading balance, nothing! It simply means how much money you can control with X amount of money, period. How much money you have in your FX account, your bank account, your mattress or your attic has nothing to do with leverage, nothing.

This is what FX is all about: "Give me $100 and I will let you own $10,000 worth of currency (100:1 leverage)". How much money is ALREADY in your FX account or how much money you INTEND to wire to your FX account each week/month is totally irrelevant.

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