Why does Friedberg Direct encourage lower leverage?

When you use excessive leverage, a few losing trades can quickly offset many winning trades. To clearly see how this can happen, consider the following example.
  • Scenario: Trader A buys 50 lots of USD/JPY while Trader B buys 5 lots of USD/JPY.
  • Questions: What happens to Trader A and Trader B account equity when the USD/JPY price falls 100 pips against them?
  • Answer: Trader A loses 41.5% and Trader B loses 4.15% of their account equity.
Example

 

TRADER A

TRADER B

 
 

Account Equity

$10,000

$10,000

 

Notional Trade Size

$500,000 (Buys 50, 10K lots)

$50,000 (Buys 5, 10K lots)

 

Leverage Used

50:1 (50 times)

5:1 (5 times)

 

100 Pip Loss in Dollars

($4,150)

($415)

 

% Loss of Equity

41.50%

4.15%

 

% of Equity Remaining

58.50%

95.85%

 

 

By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.