Drug dealers often provide free samples of their product to new customers. Snort a couple of lines. Place the one end of the tube to your nose and the other to the beginning of the line. Inhale just strongly enough to draw the powder into your nostril. One week of this exercise and you are “in” to the rest of your natural life. Speculative markets can operate the same way except the drug of choice is leverage.
We often see advertisements on the web attracting the beginners of forex by enormous leverage offers of 100:1, 200:1, 300:1 even 500:1?. Reminds you the lines of cocaine with various thickness does not it ? Turn $1000 into $100,000 within weeks! Take $10,000 and ride it to a million! Just like a drug high, a leverage high promises you perpetual bliss but in reality delivers mostly agony and pain. The truth of the matter is that in highly levered speculative markets it is far more common to see $100,000 accounts shrivel down to $1000 rather than the other way around.
The professional traders know that leverage takes control out of your hands. The more leverage you use the more defenseless you become. How many times did you drop the trade that eventually recovered just because you were over-leveraged? The margin call is the market’s secret weapon. It is the easiest way for the market to take away your money because it forces you to liquidate your position at the worst possible time, often at the absolute bottom if you are long or absolute top if you are short.
Your trading can be improved considerably if you reduce your leverage. I good rule of thumb is 2:1 leverage. For many professional traders that sounds small, but yet many others report the best of performance with this leverage in terms of return versus drawdown.
Besides your analytics will be much better with the low leverage. By trading small you execute your plan, taking stops quickly instead of letting losers run. Small stops are psychologically easier to accept and also a lot easier to recoup.
By trading on a low leverage you will tend to trade much more professionally managing the risk without fear and greed.