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.
|TRADER A||TRADER B|
|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%|| |
By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.