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Trading Leverage – How much is too much?

19 Years ago | May 13, 2015 11/27/22, 12:00 AM

By Max McKegg

One of the issues that confront all traders is how much leverage to use when trading forex. Although there is no single “right answer” to this question, there are some important guidelines.

FX “promoters” (or in many instances, hucksters) boldly advocate a principal advantage of FX trading being that you can trade on up to 50:1 leverage and that this enables you to make a lot of money, very quickly. The promoter (and a review of the internet shows that there are is no lack of them) emphasizes only one side of the ledger – the profit component.

Trading on 50:1 leverage (or anything even remotely like this) is akin to a school boy driving a formula one racing car. The leverage is far too high and allows no margin of safety, nor the placement of strategically positioned stop losses but those based solely on financial considerations. In short, trading on such leverage is more akin to gambling in a casino with no relative advantage. It is only a matter of time, before the trader blows-up his trading account.

Many veteran trading professionals believe that trading successfully over the long term requires mastering trading leverage. This means utilising sufficient leverage to enable you to maximise your trading profitability but also minimising trading leverage so that you never take “a big hit” and that any one loss or series of losses does not compromise your trading capital or your participation “in the game”.

Trading is a very much a long game and this requires effective risk/money management and determining the right leverage for any given trading situation is an important  part of this.

Although trading leverage will vary dependent upon stop loss placement and perhaps even the confidence a trader has in a given trading position, as a broad “rule of thumb” many professional traders will typically operate much of the time on trading leverage in the vicinity of 3:1.

Such leverage may seem incredibly low to the novice trader (and most certainly to the rabid FX promoter) but whilst such leverage does not provide “instant” outlier profits, what it does do is the following:

It allows the trader to withstand a series of relatively small and manageable trading losses, since collectively they do not have a material effect on the trader’s capital and it enables the trader to place his/her stop loss at a technically/strategically  appropriate level.

The size of your trading position should be made to “fit” your stop loss placement. A wider stop means a reduced trading size and vice versa.

Trading leverage is a powerful tool but if not properly respected, will likely eventually prove to be a trader’s downfall


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