August 16 2021
The reality for day traders is that forex markets these days don’t move very much. We, or rather I, tend to get quite excited with a 100 pip move in any direction. However, what does that mean in opportunity?
In EURUSD 100 pips is a 0.8% move. The average daily range of the EURUSD is probably about 60 or 70 pips at a stretch, which isn’t very much. Tight trading ranges of 60 pips doesn’t leave much margin for error, with traders trying to make 1% a day or 20% a month.
So, to make forex trading potentially more profitable/attractive, traders turn to leverage. But how much is required?
If your target is 1% a day on your pot of USD 10,000, you are looking to make USD 100 every day for a 20 day trading month. The 1% a day style of trading gives you your 20% monthly return.
As 1 lot of EURUSD is EUR 100,000.00, you need just 10 pips to hit your daily target. For a USD 10,000 trading pot, you will need your leverage to be roughly 12x.
So leverage is a good thing when used correctly.
Why is it brokers away from the regulated established markets of Europe and North America, are allowing retail clients leverage of 1000 times or even unlimited multiples, which exposes the inexperienced to reckless trading risk?
Unfortunately, it comes down to the cynical industry business model that wants the benefit from its customers losing their money in the quickest ways possible trading too large a position or over-trading. Brokers are showing a casino mentality, which has nothing remotely to do with the financial services industry.
Leverage needs a reality check, and it needs retail traders to be educated about the inherent risks. Retail traders are under the impression that having large amounts of available leverage is a good thing. Brokers play on naivety and advertise it as being essential to your trading, IT IS NOT.
Having high leverage multiples will not make you a star on IG, wealthy, attractive to the opposite sex, instantly enabling you to buy fast cars, yachts and large homes. It will most likely damage your wealth.
I hate telling people what to do or how to spend their money. If you are a gambler and not a trader, then you’re welcome to the 1000 times leverage. However, if you aspire to be a retail or professional trader, over-leverage is a danger. Your trading career is likely to be very short-lived and possibly an expensive mistake.
The vast majority of retail traders have never operated in the financial market, so they don’t know what is proper. This lack of knowledge allows brokers to treat their customers as cash cows, milking them for every penny they have. There now needs to be a broker/trader reset.
The first place to start is by bringing leverage to realistic levels. The idea of sustaining a client base over the long term as a mutually profitable endeavour seems to be a thing of the past. The new normal is greed not just from brokers but also gullible retail traders.
For retail trading in financial markets to be sustainable, it is time for brokers to be transparent about the risks of high leverage, and open about their A and B book activity. Then retail traders can then make informed decisions on who they should or should not be trading with.
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