DailyFX Tips & Picks: How effective leverage contributes to trading success
WHILE trading with high leverage is theoretically an effective way to quickly generate a good income with a small deposit, results show that it’s not necessarily the best way to trade.
As an analyst at FXCM, I meet many traders every year; they join us for our in-house seminars or our daily webinars. Many have high expectations and quickly want to generate an income with a very small initial fund. While it’s fine to dream big, as there are people that have received very good returns with a small deposit, most will do better if they trade less aggressively.
Traders depositing about £4,500 will usually trade with an effective leverage of five times their capital, and 37.5 per cent of these traders will be profitable. On the other side of this spectrum, traders depositing an average of £300 will be profitable 21 per cent of the time. Therefore, limiting trading to five times leverage will roughly double the chances of being successful. This also goes hand in hand with traders based in Hong Kong and the US being more successful than their European counterparts, as leverage is limited in these jurisdictions.
It is therefore better to trade with lower leverage and let gains compound; something that Albert Einstein called “the greatest mathematical discovery of all time”. And remember, which market other than forex allows a trader to generate a 25 per cent return on £1,000 with the same ease as if the account held £1m?
For more on effective leverage http://bit.ly/CityAM5
Alejandro Zambrano is a currency analyst at DailyFX. He leads DailyFX’s Premium Educational Seminars – http://bit.ly/PremiumEDU
Azambrano@dailyfx.com
Twitter: @AlejandroDFX