Why does FXCM encourage lower leverage?
When you use excessive leverage, a few losing trades can quickly offset many winning trades. To clearly see how this can happen, consider the following example.
- Scenario: Trader A buys 50 lots of USD/JPY while Trader B buys 5 lots of USD/JPY.
- Questions: What happens to Trader A and Trader B account equity when the USD/JPY price falls 100 pips against them?
- Answer: Trader A loses 41.5% and Trader B loses 4.15% of their account equity.
Example
| TRADER A | TRADER B | |
|---|---|---|
| Account Equity | $10,000 | $10,000 |
| Notional Trade Size | $500,000 (Buys 50, 10K lots) | $50,000 (Buys 5, 10K lots) |
| Leverage Used | 50:1 (50 times) | 5:1 (5 times) |
| 100 Pip Loss in Dollars | -$4,150 | -$415 |
| % Loss of Equity | 41.5% | 4.15% |
| % of Equity Remaining | 58.5% | 95.85% |
By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.