noobie - what's wrong with leverage?

Discussion in 'Strategy Development' started by Ron Frazier, Jun 15, 2006.

  1. I'm a noobie who's been studying currency trading for a couple of weeks and also dabbled in it about a year ago with a demo account. I now know just enough to be dangrerous. So, here's my question. What's wrong with high leverage, 100:1 or 200:1, as long as I have stops in place to limit my losses to say 2% - 5% of my account? Thanks in advance.


  2. siki13


    Nothing is wrong and you are one step ahead of idiots who are comparing
    stock trading margin with forex
  3. what happens when your stops get blown and you're underwater and you can't bail on the trade and :eek: brain freeze .............................................................?
  4. I guess I don't know what happens then. How likely is it for an account to be wiped out because of a missed stop? I can see that, if the stop were missed with a high leverage position, it could be devastating. Are you saying that the leverage should be low so that, even if the stop is missed, the drawdown will be minimal?

  5. To tell ya the truth, I don't know what happens in the currency markets either.

    I know that if that happens when trading the e-mini's (it can, has and probablly will happen again in the future), you start praying, not that that will do any good.

    In general, you want minimum leverage when putting on trades, it gives you peace of mind and assures your longevity in this game.

    From what I hear, the FX markets can be pretty treacherous waters for little fish, so to get specific knowledge on trading the FX markets, look-up Electirc Savant, he has his own thread, called The Perfect Edge and you can also do a search on his ET name and become very knowledgeable about trading the FX markets without the prerequisite ass-kicking that the markets usually hands to a trader in return for getting your skillz up to par.

    Best Regards,

  6. I am happy to tell you what's wrong with leverage.

    The issue is that if you have a high leverage then many will be tempted to take a high risk. So highly leveraged tradables like futures, forex and options let people risk more.

    The first level of good sense is to use stops and then measure your risk as the size*(entry-stop+slippage&commission). As long as you have a reasonable allowance for slippage (u can ask here what would be reasonable for something you plan to trade or do a search on slippage) then you have a good chance of getting this thing right.

    While your learning keep ur risk per position to 1% say (2% later) and total risk for all positions under 8% (portfolio heat which could go to 15% plus later).

    So, that would reduce the risk of leverage. And it would be enough if we were rational under risk and extreme pressure -- but most of us struggle with that. So, the second issue is that should you get an emotional brain fade then leverage will make it possible to blow your account out much more quickly than underleveraged things like stocks.

    My prescription:
    Do your sums very well and be disciplined. This is a business.

    Have two accounts, one in a bank with most of the money, and the other with your broker with the leveraged amount you're willing to risk in total then if you get hit by the emotional urge to do the wrong thing you can't do it until the bank wires the money to the broker. And as a second step, have some good solid discipline about explaining to your wife or parents why its a good idea to wire money now :)

    Good luck.
  7. lundy


    I'm pretty sure there are popular fx firms that guarantee stops.
  8. ya but it costs a pretty massive premium usually in the range of 10pips.
  9. Cheese


    Whats right with it?
    Get going and soak away some real big money bailing on your pluses for peanut profits & stuffing yourself up your butt with stop losses. Then you'll be ready to tell your story at ET. 'How I Lost an Arm & and a Leg Trading' which you could also publish & sell through Amazon.
  10. Let's say you have $1000 in your account. And you are using 5% of your account for one trade which is $50. And your leverage is 100:1 meaning you can trade a position of $5000 which makes your leverage effectively $5000:$1000 = 5:1.

    There is nothing wrong in your strategy because of your low effective leverage. But if you really believe that there is nothing wrong
    with a high leverage why won't you open $100,000 position with your $1000 account and see what happens.
    #10     Jun 16, 2006