Leverage and Averaging

leverage and averaging
Leverage and Averaging

We have already mentioned the notorious fact that 90% of the traders investing on the currency market lose their money. Maybe this is due to the fact that they trade with the maximum margin granted by the broker. More and more brokers rely on advertising such as We give you the opportunity to trade up to 200 times your disposable capital. By comparison, normal and practiced by most brokers is a margin of 1%, or the opportunity to trade up to 100 times your available funds. In fact, here lies the key to profits for most of the brokers, who are well-known to play against their clients as they do not cover them.

In a large extend the advertising We give you the opportunity to trade up to 200 times your disposable capital , can be translated as We give you the chance to lose your money faster. When you use too high leverage, the profits are accumulating very fast. But the losses too. If you have margin of half rate and its full utilization, this means that with only one wrong transaction, in which the market moves by half percent against you, you lose your entire initial capital, no matter how many times you multiply it before.

Brokers do not earn from spreads (that have already came to extremely low levels), but from their clients’ loss. Using statistics showing how much of their clients lose money, they rely on a large number of customers with small accounts.

Of course, trading losses oftentimes have another aspect – emotional. Frequently, trading is the result of the investors’ desire to prove their correctness, confident in the direction of a particular currency.

It is not by chance that all specialists advise not to average losing positions. For example, if a trader believes that the Euro will bounce at levels of 1.2000, it will be more profitable for him to buy at 1.1800.

It is extremely difficult for traders to change completely their expectations for a direction of movement, and especially if they use leverage without stops, this could be fatal for the account.

Actually if we accept that this is a losing strategy, although it could be practiced successfully by a small percent of traders with stable discipline, then the right one, should be to add to the position only if it is set on the expected direction. Moreover, there should be obvious signs for possible, further strong continuation of the trend.

In fact, this strategy is not new on the market. It is written about it in the early 80’s of the 19th century – It is better to be averaged in direction than to lose positions.

The big problem for the investors, however is the psychological disposition to buy at higher prices. They always think that they have missed the moment. From a psychological point of view, it is much easier for a trader to complete the position at lower levels than at higher , and actually this way of thinking is the reason for massive investment failure.

Like this post? Please share to your friends:
ForexZig - Professional forex trading