Before we begin this post XBTFX wants to yet again emphasize several crucial points about leverage and trading as a whole. Please note that, XBTFX , as a primarily STP broker with direct connection to Liquidity, has at its best interest to have profitable traders that keep on trading forever.
Real STP brokers make their money from commissions. There could be cases where hedging is required to protect from Black Swan events, for example, such as the removal of the peg in EURCHF several years back, however, this method of hedging has to do with risk management, not profit seeking.
Before we explore the importance of leverage in trading we want to stress couple of points first:
1. If you haven't yet, please read our first piece on leverage use here - https://blog.xbtfx.io/education-what-leverage-to-use/
A key take away detail from the our first post is a study conducted by DailyFX that found :
40% of traders are profitable when using leverage under 5:1 and notice how that profitability % goes down with higher leverage.
2. Secondly and perhaps most importantly never risk more than you are willing to loose. A key concept outlined by Warrent Buffet, on the idea of leverage, is to never bet money that you need, to make money you don't need. Leverage needs to be respected and used with caution, yes, it can generate great profits, however, never put more capital at risk than you can afford to loose.
3. We stress that while we do offer 500:1 leverage due to the enormous demand for it, we don't support the use of any leverage over 100:1 and we believe traders should ideally use 50:1 and less. Leverage in the EU and US is limited to about 30:1 for non-professional traders and there is a good reason for it. People get drawn into false advertising and promises of quick riches and take a lot more risk than they take. When that happens you are not trading, you are gambling.
XBTFX will never advertise with promises of riches or huge returns (if you ever notice any such ad ran with XBTFX's name please notify us). Trading is not easy. Trading is not a get-rich-quick scheme. Trading is a slow but rewarding grind.
4. When using high leverage remember that if you loose 50% of your account you need to make a 100% return with less capital to get to a break even point.
5. When using leverage such as 100:1 remember that if you have a $1,000 deposit and you utilize your leverage fully you gain the ability to enter a 1 lot trade ($100,000). XBTX has a 80% Stop-out level to protect client funds from over leverage which means that a 20 pip move in EURUSD will leave you $200 less. To loose your total amount you will need a 100 pip move with that leverage which less than a 1% move.
6. Traders should also note that the Capital they put at risk not to be more than a % of their Net Worth that they are willing to loose for purposes outside of their control. Outside of the risk of trading by itself there is also the risk of force majaure circiumstances - markets being shutdown (during World War II the stock market was closed for several years), hacker threats, broker insolvency, liquidity provider insolvency among some that have happened more than once in the industry.
This post has been prepared by XBTFX.
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