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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.
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 41.5% 4.15%
% of Equity Remaining 58.5%

95.85%

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