eToro
By eToro
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Finally revealed: Why High leverage trading beats Low leverage?

Hi everyone!

 

I wanted to write about this topic for a long time, because there is a common misunderstanding. Traders think, that Low Leverage (x25 and down) equals Low Risk and High Leverage (x100 and up) equals High Risk trading. Let me clear the air for you: this is not true.

 

Let me start with an example:

 

Trader 1 (T1) is a “Low risk trader” and trades EURUSD with x10 leverage. Trader 2 (T2) is a “High risk trader” and trades EURUSD with a x100 leverage. T1 and T2 both have $20.000 and they both have the rule, to risk only 5% of their equity on a single trade.

 

T1 opens EURUSD short @ 1.3000, x10 leverage, 10.000 units. He needs a margin of $1.000, SL @ 1.4000, TP @ 1.2000.

T2 opens EURUSD short @ 1.3000, x100 leverage, 10.000 units. He needs a margin of $100, SL @ 1.3100. TP @ 1.2900.

These are the default settings, for opening a trade, but the trade can be managed later: T2 adjusts his SL to 1.4000 (depositing an additional $900 margin), and his TP to 1.2000.

 

Now the T1 and T2 have exactly the same positions: 10.000 units, with SL @ 1.4000, TP @ 1.2000, losing $1.000 if the trade goes wrong and winning $1.000 if the trade turns green. This is 5% of their equity regardless if they are trading low leverage or high leverage. This is exactly the same risk/reward ratio. So what is the difference?

 

The difference is that the High Risk trader can manage his positions more freely, because he can always return the unneeded margin to his balance. If T1 and T2 want to set their SL to 1.3500, then T1 still needs a margin of $1.000, while T2 only needs a margin of $500 and $500 is returned back to his balance.

This way the High Risk trader can free up most of his equity as soon as a trade turns green.  I combine this with my Hand Rule form my previous post.

 

In my strategy this means, that I always change my stop losses when needed, but never allow bigger losses than the original plan. When I move a SL lower it doesn’t mean, that I am not keeping myself to the rule, it simply means that I just don’t tie down my money unless needed.

 

Of course this is my opinion, and I’m always open for discussion. Feel free to visit my wall or ask questions.

 

In my next post I will give you a step by step guide on how I open my trades. Good luck to all, and keep those profits coming!

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