Welcome back for a quick educational video on over leveraged trading. This ties with greatly, and I want to elaborate on this a bit more to give new and experienced traders my understanding on this topic.
It's important to know that leverage can work for you as well as against you. You may already hear this a lot when you open a new broker account. However, it's only when you actually start trading then you will understand the true meaning of this.
When you enter a trade with leverage, you are entering with a great risk behind if you don't have proper risk management. Since leverage is a “double edge sword”, trades that are in profit or losses will be magnified. You are easily over traded, meaning you can have multiple entries on the same pair or same move/run. Again, this would be nice if the trades are going in your favor, but if not then you are going to have a huge drawdown of your account. Professional traders understand drawdown is evitable, but they also minimize it so when they are in profit, they can easily make the drawdown backs.
Let's take an example of what an over leveraged trading combine with could look like:
---enter a trade, and with a big position (no risk management, and not consistent with trading plan)
---begin to see price fall, then either he/she will have a SL and get taken out, or no SL then price will continue to drop then the small account is gone in no time due to the big position.
---If he/she did have a SL, then they are taken out, but just lost a bigger % of their account. Now the emotions kick in to try to “chase” the money back. So revenge trading emotions start.
---Because the account has high leverage, the person can easily open a bigger lot position, double the previous one in fact (same strategy out there says to do this) and make back your losses. If first trade was risking 5%, then this next trade is 10%)
---After several losses, the account is already cut in ½, and he/she can no longer open the high lot positions.
---They will then reduce their position size, but still at maximum leverage allows.
---Soon the account will get blown out, and the person will either blame the market, strategy, lesson and more.
I see this cycle of trading all the time in new traders, and it has a combination factor such as emotion, mindset, risk management, trading plan and more. But what is easily controlled by you is to reduce leverage allowed on the account. Simply dropping it down to less leverage will help the trader to not over leverage, and maintain a few trades only with smaller position sizes.
So, I encourage the new traders to really think about this topic and reflect on yourself to see if you ever fall into this cycle before. You may not blow your account, but certainly have experienced revenge trading and over leverage trade when the emotions kick in. I myself included it at the beginning of my trading journey also.
That is all I gotta say on this one.
Let me know if you have questions and feedback :)
I will chat with everyone next time in my live stream.
Unless, of course, one is scalping. :- )