Super traders meet forex leverage: become millionaire or a wipe out

Forex leverage a boon to super traders who want to become millionaire but can wipe out trading capital too

Forex leverage is a very attractive feature of currency trading. High levels of forex leverage available for currency trading allows traders to employ very little forex trading capital. The draw to individuals: “I use very little to make more money“.

Although it is true that forex leverage is very useful, it is a double edged sword. In my previous posting, ‘Can I become millionaire in 1 month with $10k forex trading capital?‘ we looked at the use of 800:1 forex leverage to multiply $10k into 1.05 million dollars in 3 successful trades. This posting was quite successful because apparently it tickled some young traders in our community. One little overlooked point in the story is that when we use 800:1 forex leverage however, it requires a winning trade of 50 pips to make 4 times trading profit to forex trading capital but only 12.5 pips to wipe out the trading account.

Its amazing we can use little money to make more money … but losses are quicker

Forex Leverage20:150:1100:1400:1800:1
Outcome (see below)ABCDE
Forex trading capital$500$500$500$500$500
Forex margin (fully margined)$500$500$500$500$500
Position size$10,000$25,000$50,000$200,000$400,000
50 pips win$50$125$250$1000$2000
Return on trading capital10%25%50%200%400%
Slop loss to wipe out trading capital500 pips200 pips100 pips25 pips12.5 pips

Outcome A

  • A winning trade of 50 pips will produce $50 trading profit or 10% return on trading capital in 1 trade
  • It takes 500 pips to wipe out the trading capital
  • If the trader uses a 1:1 reward to risk ratio to set target price and stop loss level, this trading setup can withstand 10 consecutive losses

 

Outcome B

  • A winning trade of 50 pips will produce $125 trading profit or 25% return on trading capital in 1 trad
  • It takes 200 pips to wipe out the trading capital
  • Based on the same 1:1 reward to risk ratio to set target price and stop loss level, this trading setup can withstand 4 consecutive losses

 

Outcome C

  • A winning trade of 50 pips will produce $250 trading profit or 50% return on trading capital in 1 trade
  • It takes 100 pips to wipe out the trading capital
  • Based on same 1:1 reward to risk ratio, this trading setup can withstand 2 consecutive losses

 

Outcome D

  • A winning trade of 50 pips will produce $1000 trading profit or 200% return on trading capital in 1 trade
  • It takes 25 pips to wipe out the trading capital
  • If the trader retains a 50 pip stop loss (1:1 ratio similar to target setting), this trading account will be wiped out in 1 trade so the 1:1 ratio can no longer be employed.

 

Outcome E

  • A winning trade of 50 pips will produce $2000 trading profit or 400% return on trading capital in 1 trade
  • It takes 12.5 pips to wipe out the trading capital.

 

Putting wipe out trades into perspective with EURUSD

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Using forex leverage requires skill: user could bring home more trophies or die faster

Lets consider EURUSD now at 1.3000.

Using the 20:1 forex leverage, the trader could withstand 500 pip loss e.g. EURUSD 1.3000 drops to 1.2500 or equivalent to 3.85% of underlying movement.
Using the 800:1 forex leverage, the trading account killer is less than 0.1% underlying move.

 

Trading should consider technique and risk management. It is brains over brawn. And the commercial message is: come and see our forex trading performance from the beginning of 2013.

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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005. Soh Tiong Hum is a member and regular speaker at Technical Analysts Society Singapore events and has a bi-monthly lunch time event at IG Singapore on forex and stock markets. He is an avid blogger on technical analysis topics; his Twitter account @sohtionghum was ranked #23 out of The Top 70 Twitter Accounts To Follow In 2015 by MahiFX. Come find Tiong Hum on Google+
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