I believe that leverage is reason number one why so many people fail in Forex and CFD trading. I know that because I experienced it by myself and it took me a while to understand that and work on that.
Article published at fibotrading.net. Please do not copy without permission.
Solution? Lower leverage. In most cases, you can manually lower your leverage from the panel.
Reasons why it is good idea to lower leverage
There are a few reasons why you should give it a try.
1. Better chances to survive
You are doomed anyway. You know the statistics that something like 80% of traders do not make it (they are losing money). Many of them lose everything.
You think you are special? Trust me – you are not.
Statistics give you a few months before you lost everything. If you can survive a year, your balance still will be negative and it is not sure if you ever will be profitable in trading.
If you start with lower leverage than you have much better chances to complete your first year without losing it all.
Thanks to that you can survive that year and have some capital you will be able to learn something.
Psychology is a huge part of trading. Like really huge. Most people look for the best trading strategy but this is only a smaller part of this game. You can have a great strategy but if you manage your money poorly then you will not be successful. Why you manage your money poorly? Because of psychology. Greed, fear, excitement… Emotions. With time you will learn how to control your emotions. It is probably the hardest thing to do in trading. Still, it is much easier to achieve when you are not trading with higher leverage.
AUDUSD is in a strong downtrend. You saw a tip from a trader on Instagram that he went long. This trader had some good calls in the past. You decide to open the same long trade. Your account size allows you to open 1 lot which is most of your margin. First, it goes well and you are 400$ up. Suddenly price reverse but you are still in profit. Later there is some move up and you are 600$ up. He was right, this move will be strong. Suddenly, there is a strong selloff and your balance is -200$. It’s a lot of money, you are afraid to close it and you are sure that this move will reverse. You are -500$ but you are holding to a losing position because this is a potential big loss for you and you try to convince yourself that it will reverse and you should wait it out. We can go on with this story but you get the point.
When there is big money in stake you start to think differently and you do not follow your trading plan. Money and psychology are correlated.
3. Learn on your mistakes
With lower leverage, you have more time and more opportunities to make mistakes and better chances that you learn something from them. With higher leverage, this time is much shorter.
4. Proper money management and 1% (or similar) risk per trade
What is a problem with 1% rule on bigger leverage? You are able to open many trades at the same time. Let’s say you have opened 7 trades, each with a stop loss set with 1% rule. You risk 7% of your money, not 1%.
With lower leverage, you are not able to open as many positions. It is much easier to stick to 1% rule.
5. Normal life, less stress
It may look cool in movies or pictures:
In real life, trading should be boring. It shouldn’t be a source of adrenaline or any kind of sport. When you are not able to open big positions then it is easier to keep your emotions in check. Thanks to that you are not stressing too much about open position. Believe me – you do not want to go to sleep when you have an open position running with 5 or 10% risk on big leverage. You want to stay in the game for a long time that’s why your goal should be to have a normal life.
6. Don’t chase your tail
Let’s say that you manage to survive on account with bigger leverage. At this point, many traders struggle to be profitable on regular basis. Often the problem is gambling. They have a tendency to open pretty big trades – sometimes they win a lot so they keep going with their big positions. There are times that they lose – when they do take a loss it is also pretty big. So, in the end, it is kind of sinusoidal move. They are addicted to big wins so they don’t follow money management rules. They are chasing their own tail and regularly profit regularly.
How many accounts have you blown?
I hate this question. There is this misconception that you have to blow a few accounts before you will be profitable. That’s not true. The main reason why new traders are losing all or most of their money (blowing an account) is that they don’t know how to manage money and risk so they use too big leverage, they open too big position.
Forex itself is a normal market where technical analysis can be used like in the stock market or commodities. We have patterns, trends, averages, price action and so on. It is the same stuff that works well everywhere else. You have to understand that most traders do not lose in Forex because of bad strategy. They lose because of poor risk management.
And still, what is the most searched thing by new traders? Right, holy grail and best trading strategy.
So what leverage will be best for you?
Depends from a trader and his experience. In my opinion, for new traders, best leverage is 1:30 or lower. I would recommend leverage even as low as 1:5 or 1:10. Yeah, I know, this is very low leverage. But you may point out that Forex and CFD advantage is leverage itself. Yes, that’s true. Leverage is not a bad thing, but here we are talking about new traders. It is similar to a driving course. You start with a slower car, not with a turbocharged supercar. First, you have to learn how to drive. With more experience, you can switch to something faster. Trading is similar. You are new to trading? Start with lower leverage. Be profitable and consistent. Then set your leverage higher.
All that dreams about money and freedom
This is a topic for a separate article, but I have to repeat it until you understand it. All that traders from Instagram and their lifestyle and screens from a phone with profit – it is a fucking bullshit. Usually, their feeds look like this:
Trading is hard. There are many good strategies but humans do not follow rules. If you are a new trader, inspired by Instagram traders and freedom then you want to make money fast. You use too big leverage and you lose fast. End of story.
Learn how to trade with lower leverage, save money for your trading capital. Profits will come later when you will learn how to trade.
But… I need 1:50 / 1:100 / 1:500
That is a wrong mindset. Some traders look for brokers with the highest leverage like 1:100 or even 1:500. Reason for that is they want to invest little money and make huge gains in short time – for example, they will fund their trading account with 200$ and thanks to the high leverage they will try to make few thousands of dollars in short term. Is it possible? Yes. Is it trading? For me no, it is gambling, nothing more.
OK, so this post is mostly about leverage which can be dangerous for new traders. So maybe demo trading will be a better choice?
Trading is about psychology and following your strategy. You need real money to experience all the factors that are important in trading. In demo trading, you don’t have that. That’s why you should trade with real money but on lower leverage.
Make a plan, follow your progress on MyFXbook
Myfxbook.com is a great tool to check your trading statistics. Not only win rate but other factors like biggest profits and losses, the average size of winning and losing trades and so on. Sometimes you are convinced that you follow your plan but when you check numbers with MyFXBook the story is different.
You should have your trading plan but it is important to follow your progress and with tools like MyFXBook it is much easier. Then it will be easier for you to decide if this is a time to increase a leverage.
You have to decide if you treat trading seriously if you treat it as a profession. If yes then you have to prioritize money and risk management. For new traders, it is much easier to do so with lower leverage. Remember – it takes time to master trading. Most new traders don’t have this time because they use too big leverage and they end with an empty trading account. Build your trading skills and your trading account and when you are ready then increase a leverage.