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
|Outcome (see below)||A||B||C||D||E
|Forex trading capital||$500||$500||$500||$500||$500
|Forex margin (fully margined)||$500||$500||$500||$500||$500
|50 pips win||$50||$125||$250||$1000||$2000
|Return on trading capital||10%||25%||50%||200%||400%
|Slop loss to wipe out trading capital||500 pips||200 pips||100 pips||25 pips||12.5 pips
- 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
- 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
- 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
- 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.
- 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
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's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."