A major reason new traders fail is due to trading leverage being too high. Their account balance is too small compared to their open trading positions - or too many lots are being traded for the account size.
Leverage is calculated as follows. Divide total contract size into your account balance value.
So, for example:
Let's say account balance is $20K in a mini account ($10k lots) and you have 5 trades of 2 lots each open. This means your total contract size is $100k.
Your trading leverage is therefore 20,000/100,000. ie 5:1 trading leverage.
Richard Olsen, co-founder of FX brokers Oanda, made a study that showed optimum returns in the forex markets occur at a leverage of 4:1. More than that and it's likely that your drawdown is unsustainable and will eventually blow your account
Most professional traders and money managers trade one standard lot ($100K) for every $50k in their account. That's a leverage of 2:1. In a mini account, this translates to one mini lot ($10K) for every $5k.
Some forex brokers seem to encourage over-leveraging by advertising high-leveraged accounts - for example 200:1 - as if it's a good thing. It's not. Just because they offer that high leverage, doesn't mean you have to use it of course.
Here's an example to illustrate the point. Consider two trades, A and B:
|Value of open positions_______||$500,000||$50,000|
|100 pip loss ($2 /pip)||$2,000||$200|
|% of account left||80%||98%|
Trader A could only survive another 4 of these trades and then would be wiped out. Trader B could sustain a lot more losses and still be in the game.
Personally, I tend to keep my leverage below 5:1. That would be a maximum and I rarely use that level. In fact most times I'm trading at a leverage of 1:1 or 2:1.
It grows my account more slowly than highly-leveraged traders - but on the other hand, I'm still in the game.
Other pages in this series on Harmonics Basics are:
Learn how Adaptive Position Sizing can grow your account balance - exponentially.
Real-time harmonic alerts to pc and email. Free harmonics education videos and harmonic software. Harmonic traders chat room.
Over 15 hours of educational lessons narrated and presented by the originator of Harmonic Trading, Scott Carney.