What Experienced Traders Know (Part 1)

With so much trading information freely available online, why are the majority of retail traders still losers?

How is it that everyone has access to the same information, yet only a small fraction of the trading population are able to make consistent profits?

The short answer is that winning traders see things differently from everyone else. They possess insights that allow them to think one step further than most people.

For example, an amateur trader sees the broker’s spread and thinks: “this is how much I have to pay per trade”.

The winning trader sees the same and thinks: “this cost structure benefits longer term traders at the expense of short term traders”.

And thus, in seeing things that others do not, winning traders are able to take the type of actions that do not make sense to the ignorant majority (such as choosing to trade in the medium term rather than the short term).

So… what are some other examples of how winning traders think differently?

Let’s find out!

#1 The More Leverage Available, The Better

Conventional wisdom says to trade with low leverage. The idea is to keep losses small, since large leverage eventually leads to large losses.

On the surface, this sounds like good advice… but this is technically inaccurate.

You see, in the context of trading, the term ‘leverage’ can refer to two different things.

Allow me to explain with an example:

Imagine you have two separate $10,000 accounts, one with 50x leverage, and one with 400x leverage.

Now let’s say you take a losing trade on both accounts:

Account 1 (50x leverage)
Buy 1 standard lot ($100,000)
Used Margin: $2,000 ($100,000/50)
Available Margin: $8,000
(After Losing 40 pips) Dollar Loss: $400

Account 2 (400x leverage)
Buy 1 standard lot ($100,000)
Used Margin: $250 ($100,000/400)
Available Margin: $9,750
(After Losing 40 pips) Dollar Loss: $400

Notice how, even though Account 2 has eight times the leverage of Account 1, the dollar loss is exactly the same. The only difference is the used margin and free margin components.

In this case, a larger account leverage gives you a larger portion of available margin, allowing you to withstand a larger amount of paper losses before getting a margin call. In other words, the higher the account leverage, the higher the survivability of your trading account.

(To learn the difference between the maximum leverage and actual leverage, read this post.)

In this way, leverage gives you flexibility and options. You may hold on to losing trades for a longer period of time, or even initiate a new trade. A larger account leverage makes this possible.

Of course, the downside is that if you do get a margin call, you’ll stand to lose more of your capital. This said, the point here is that a margin call (and the survivability of your account) is directly tied to the trading lot size, not the account leverage (again, read this post to learn the difference).

Thus, when given a choice, experienced traders will always choose to open a brokerage account that allows for as much maximum leverage as possible.

Because it’s not the maximum leverage that’s dangerous… it’s the trading lot size that you have to watch out for.

By |2019-04-25T08:35:26+00:00April 25th, 2019|General|4 Comments

4 Comments

  1. Kristian Klastrup August 4, 2015 at 8:13 pm - Reply

    Hi, I’m sure those thing’s I received is serious stuff. But I don’t really
    read anything anymore.

    I’m and very succesfull trader after the first 2 years miserable start.

    Now on my third year I make big bucks everyday on both short and long term
    trades.

    I’m sure I use technices that nowbody knows about. And I’ll lile to keep that way. Cause to many good stuff around will spoil the market in a couple of years.

    Cheers

    Kris

    • Chris Lee August 4, 2015 at 8:21 pm - Reply

      Hi Kris,

      It’s great that you’ve found a method that works for you. 🙂

  2. Ken September 15, 2015 at 3:09 am - Reply

    Chris,

    Any Good broker with leverage of 1000? 🙂

    • Chris Lee September 15, 2015 at 5:43 pm - Reply

      Not that I know of… the highest I’ve seen is 400.

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