Leverage and margin call: trading Forex without protective stops
This is what I read and copied from the Forex Money Management site and it seems a bit contradictory to me :
'There is final but very important fact every trader should memorize:
If you are ever going to step away from the charts and leave trades open without placing protective stops, take the lowest leverage possible or don't take any at all.'
The lowest leverage = the highest margin percentage required = risk for margin call increases..
So it seems logical that with a small account it's best to take biggest leverage , not so much real money to lose , but always be careful not to trade large units or many positions. The real danger imo is not in leverage, but in trading bigger volumes. The lure of fast and big profit.
So my idea, if you step away from the charts and not use protective stops, be sure to be trading as small units as possible (with the highest leverage) or don't trade at all ?
Or am I wrong ?
"If you step away from the charts and not use protective stops, be sure to be trading as small units as possible (with the highest leverage) or don't trade at all."
With a low leverage you won't sustain large moves against your trade and, as a result, your account will be asking for a margin call sooner.
However, I think I know where that first expression came from. Let's look this way.
If we take a $1000 account and leave an open trade unprotected, and allow it to catch a margin call.
What results will we get?
Shold we had a high leverage with smaller margin percentage required, our account would melt longer and deeper before getting a margin call. There will be very little money left afterward.
Unlike with lower leverage and larger margin percent required - an unprotected account will catch a margin call sooner, positions will be closed and more money will "survive" on our account.
I think the author referred to big investors.
(In figures, with 200:1 leverage and 0.5% margin requirement, a trader will be left with 0.5% of the account value after a margin call. While with 20:1 leverage and 5% margin requirement a trader will be left with 5% of the account value after a margin call).
So, as you can see, in any case it is very dangerous to leave trades unprotected.
If your trading account is small, you'd benefit more from extra leverage which allows to sustain larger price changes, and in the worst case you'll lose not that much, however, if your account is large, the leverage may hurt a bad money manager.
I hope I answered your question.
All the best!