Over-leveraging kills: True?

1 of the most common sayings in FF is saying "don't overleverage because it will blow up your account."
How is this true? From what I understand leverage just affects how much margin is required for you to place a trade.
The higher the leverage, the less margin is required.

Don't you think the more accurate saying for newbies like me is "don't trade too big for your account size?
A 1 lot in $100,000 account is the same using 1:1 or 100:1 leverage.

Your thoughts?

That is why some people talk about effective leverage. 1 Lot per 100k is 1:1, regardless of your account leverage.

BTW: I think that whole "blame it on the leverage" logic is flawed. Leverage is a double edged sword. It simply comes down to the volatility of the market and the accuracy of your entries. If you're trading some (late) Asia ranges with very good entries there is nothing wrong in trading 1 lot per 1000 equity.

Don't you think it should be "don't trade too big for your account" advice more appropriate?
I kept hearing this advice and I kept getting confused on how in the world can leverage blow you up.
I think its the position size that blows you up.

greed in it nature knows no limits, other then rock bottom. And thats the way it goes, levergage speed up the process you can blow it all in a blink of an eye. and now its your turn to find out what greed can do for you .

You cannot only talk about position size because position size alone doesn't tells if it's itself too big or nor for your pocket (account), that's why we talk about leverage because it's a ratio of your position size vs the balance in your account.

Then your broker decides how much of leverage it will allow you, and then you must decide how much in the range your broker allows you will be the maximum for you.

The issue is not leverage.
The issue is to stop placing crap trades.
Of course if one makes only 1 mistake = end of game; that is not good either.

well you contradict yourself in one post.
the point is that you cant know the outcome of a trade. and betting the account on 1-2-3-4-5 trades is gambling feed by greed.. leverage make this possible. in short time periodes. Take eurusd on last Friday With a 1:500 leverage on your pos. you had the possbility to blow your account at least 10 times on that day with 1 trade.

you can simplify it like this: the higher the leverage the bigger the lot size. The bigger the lot size the smaller the SL. Small SL

you cant win on every single trade , if your rr is 1:2 , winning 5 trades out of ten still put you in a good profit. just stick to your game plan just like mayfairweather.

Very well said.... The reality is no one, well at least publicly, promotes accurate entries. Should accurate entries be promoted, and systems developed you will slowly see that people will risk more and use higher leverage as the stop loss used be defaults would be less. Also to the person who started the thread, please note the following. Most people DON'T over leverage, and notice how those who don't do it still happen to margin call the account.
So, I would agree that over leveraging will kill your account, mainly if you are "heads or tails" trading. If you have a system developed around entry accuracy then you would be silly to not trade with a bit more risk. As someone else above pointed out, that using 1000:1 leverage with an account of say 10,000 usd isn't over-leveraging... Not unless you are using big lot sizes.

It is just a pessimists' view and logical opposite for claim that overleveraging enriches.

You have to understand that average daily move of 1% would be a larger amount for $100K trade than for $10k trade. You need more money to sustain the same stop levels or daily fluctuations against you even as you are able to open larger positions with less money in account.

Ya... keep up with patience & use low leverage & low lots.... but practice in demo account with high lots but dont do the same in Real account.... becoz there is NO room for mistake in Real account!

The use of "proper leverage" only means that it takes longer to lose all the money in the account.

So basically its the oversize that kills not the overleverage?
A 1 lot trade in a $100,000 account is the same with a 1:1 leverage vs a 100:1 leverage.
Correct me if I'm wrong here.

Absolutely correct.

Leverage simply affects the margin requirements.

These are margin accounts. So if you are using a percentage risk, and cutting a position at xyz percent equity then the levearge of your account 1:1 or 100:1 only affects the number of open positions you can take.

It's the positions oversizing that kill the accounts, not the leverage.

It's not so much that the "leverage kills" it's the "bet everything on this correlated instrument with broker offered leverage" that kills. And if "SHTF" and resting liquidity is hit market wide because big boys decided they need to reverse due to some market shifting event, the effect of that through correlations/hedging/'too big to fail market makers' is spilling over to other markets (possibly quickly as seen in recent temporary crashes) - which means that currently uncorrelated assets become correlated. So even if you had a "uncorrelated leveraged portfolio" (invent some nice name like "high grade uncorrelated investment structure") that works for 10 years, "overleverage" (notice the "OVER") ensures that it will still blow up.

Can you calculate the price where you'd get a margin call? Bucket shops can change margin requirement intraday and are secretive about how they calculate the margin requirements.

It seems to me that with broker offered leverage you don't know where your "stop loss" is but the bucket shop/lp does (assuming you are trading with "mental" stop loss - though if you always have same counterparty, it gets pretty obvious to them at which % loss you get out regardless of whether you have public stops or not).

When "SHTF" and all quotes get withdrawn, the so called "liquidity providers" will look for liquidity instead of providing it. Retail platforms "always" freeze when that happens (probably so the bucket shop/LP's can sweep the liquidity in their pockets before retail can get out/cancel resting orders).


This all boils to:

If you do use leverage:
1) use multiple brokers and trade in ways that they can't figure out whether you're stopping out or entering
2) don't use credit(margin/leverage) from brokers as that technically shows your hand

With respect to futures I suspect it's possible that that the special market maker clients of the futures exchanges are able to figure out more things than someone trading thru say IB. Unless I'm wrong it costs $$$/month to get their basic data feed, who knows what additional data they give you for $$$$$/month - I'm guessing you can probably get unique ID's to identify each trader and then you can figure out how much pain they can take etc.

1 Lot means 100k of the first named currency. So, you're right for USD/JPY and ~50% off for GBP/USD.

With previous discussions on this same topic, there has been confusion, simply because the term "leverage" is often used to mean two very different things:

1. Maximum leverage allowed by your br0ker. This is fixed (e.g. 100:1) and has no bearing on risk. It merely determines how much margin you have to place trades.

2. Effective leverage (aka "trade leverage" or "true leverage"). This refers to the size of the positions you're taking (1 lot = a 100,000 unit position) relative to your account size. For example, if you have only $20k in your account, but you trade 1 lot representing a $100k position, then you're effectively utilizing leverage of 5:1. Hence, by this definition, leverage is directly related to risk, and "overleveraging" means taking unduly large position sizes, which means that a series of bigger losses will likely cause significant drawdown in your account.

This is why you should always use a stoploss. Then you don't need to worry about blowing up your account.