Why does FXCM 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.
Account Equity$10,000$10,000
Notional Trade Size$500,000 (Buys 50, 10K lots)$50,000 (Buys 5, 10K lots)
Leverage Used50:1 (50 times)5:1 (5 times)
100 Pip Loss in Dollars-$4,150-$415
% Loss of Equity41.5%4.15%
% of Equity Remaining58.5%95.85%

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