Forex Leverage as speed

One of its greatest features, flexibility, can easily become one of your biggest hurdles. The aim of this article is to share the traders about how you can feel a little more comfortable with this important aspect of the FX market.

Before we delve deeper into the concept of trade sizes, it is important to note that many of the world's best traders keep the leverage on a more or less regular quotient of 10:1 or less. This would be a trade position sizes over $ 100,000 with a balance of $ 10,000 is equal to (100 thousand trade size divided by $ 10,000 account balance = (100 thousand / $ 10,000 = 10 to 1 leverage (often as a ratio as 10:1 expressed)). In FX market is for most traders, a leverage of 50:1 available, and in many jurisdictions is a much higher available.

While this can be beneficial, if the trader is on the right side of the movement, it can be a disaster if the trader is on the opposite side of the trade.

The use of excessive leveraging can change our outlook, our reaction and decision-making processes. Therefore, keep the world's best traders to leverage their more moderate levels of 10:1.

The use of higher leverages brings more risk points in the portfolio, which can significantly alter the management of positions, entry into trades or even market analysis for traders.

Why Leverage is so important?

Do you remember how it was when you learned driving? Those from New York City or other cities with access to public transport would this analogy might not correspond so much, so we will explain it more clearly below.

If you learn driving a car, you will first stopped at a slow speed to start. This is a special logical introduction to driving, because the slower speed allows longer reaction spreads - and thus limits the risk by the dangers of speeding will be banned.

If the driver feels comfortable, he gradually increased his speed.

Eventually, they merge onto the highway, along with the rest of the market.

Leverage is like speed - High speed and / or leverage can be dangerous

Hereby Some even go a step further and exceed the posted speed limit, so you expose yourself to a whole host of new risk factors that greatly increase the likelihood of an accident.

Professional cyclists usually reach more than 320 km / h but that does not mean that any experienced driver should do this. And for new drivers who have little experience in handling a motor vehicle, the potential drawbacks could be disastrous.

Leverage is speed

If new traders learn to speculate, then less risk - just as with inexperienced drivers who will befriend with traffic - often the best.

Just as novice drivers, who must control their speed as they get to know the road, traders should speculate lower leverage levels, while they get to know the market.

A lower error leverage can not only make LESS expensive, but it can also simplify it for new traders to deal with the various emotions that go with this kind of speculation, hand-in-hand.

How "low" is low ? - Learn how to effectively use leverage Trader

Unfortunately, there is no fixed rule as to how much leverage for Neutrader "best" is. When we explain the DailyFX traders to familiarize themselves with the first market operations with the demo account and without financial risk familiar. If they feel safe enough even to risk hard cash, traders should trade with very little or no leverage.

For our traders with a $ 10,000 capital, this would mean a mini-position (position 10 thousand) or maybe two mini-positions with a maximum trade size (10 thousand trade size / $ 10 thousand capital = 2:1 leverage ) to trade.

Once they have made friends with the trading with low leverage, the trader may try to increase their level desired.

In our series "characteristics of successful traders" we realized that traders, low leverage levels anwandten in the observed period of time, able to provide better trading results. The picture below is an excerpt from the article " How much capital should I trade in Forex "shows that traders who used a 5:1 leverage, often by as much as 76% were profitable as a trader, applied the exorbitant high level of leverage (26:1 in the study).

Less is more; trader with more moderate leverage got much better results

Directly from: " How Much Capital Should I Trade Forex With ".

While it may be helpful to use fixed leverage sizes, such as 50 thousand in positions with a capital of $ 10,000 (10 X 5 = 50 thousand thousand), there is for traders perhaps better ways to calculate trade sizes.

Nevertheless, a risk of 5:1, the trader does not protect against a disaster. If a trade is not managed, 5:1 can also make a margin of 50:1 form (although slower because less speed is applied).

A better option might be the entire suspension at each "idea" to limit. This is possible by determining the percentage between account and trade. In this way the risk through various trades can be uniformly managed across, so that the total exposure is limited at all times.

So, let's take the example of - as opposed to opening a trade with a 5:1 leverage - that we want to risk 1% on the idea, and then we put the trade size determined according to the desired stop value.

To remain the trader if the trade does not work out, still 99 percent of its accounts.

Below you will find the formula for this. All that the trader needs to know to perform this calculation, capital, desired risk percentage and the desired stop distance. The formula is shown in blue and in red is an example This example sets the following details: $ 9,185 capital, with a 1% risk with a 75 pip stop at this USD / JPY trade.

A simpler way to perform the bill quickly

A recent tool in FXCM App Store can help traders quickly and intuitively calculate their trade size according to the risk percentage directly from their charts. This tool is called " FXCM risk calculator "and is available as a free add-on for Trading Station II is available.

In the picture below I have the risk management calculator used with the same inputs as in the previous example.