When you trade Forex, you can take advantage of opportunities to go either long or short, trade around the clock, or even capitalize on high liquidity. But these benefits depend on your capacity as a trader to be disciplined and to know when to stop, because overconfidence is one of the biggest challenges a user can go through. When this happens, you’re more likely to take excessive risks and ignore some red flags in the market that tell you to take it easy.
Therefore, you may also tend to use too much leverage and end up overtrading, and this indicates the moment when you must improve your trading strategy. So, here are three points of reference to consider as too much leverage and how to change this.
When your position hits a stop-loss too many times
Using a stop-loss strategy is a great start to becoming a disciplined trader, because you understand the importance of cutting losses and securing gains in a safe environment. So, once the price of a currency pair reaches a certain point, the system automatically sells or buys according to your settings.
However, it can be possible for the position to reach stop-loss more frequently than it should, and this shows you a few things. First, you might have chosen to place the stop at a predictable point, which can be below or above the swing high. Then, you may enter a trade without confirmation, which is why you need to be patient.
You can avoid making this mistake over and over again by observing the real-time market behavior and analyzing the technical structure of the market, so you will better place stops according to where the market is moving.
When you experience frequent margin calls
Your margin account comes with various requirements regarding the value of your securities, so you get a margin call when that value is affected by volatility, for example, and is declining. When this happens, you might need to sell assets or add additional funds to the account, so you must do thorough research to compare brokers and choose one with suitable requirements for your risk levels. For example, 1:1000-1:3000 leverage forex brokers allow you to better control your position while amplifying your profit potential.
Usually, the higher you choose the leverage, the lower your initial margin requirements are. But this comes with an additional risk, since you’re more exposed to it. So, you must monitor your account equity to ensure there are fewer chances of frequent margin calls, as there’s no issue if it happens rarely. At the same time, you must maintain a diversified portfolio and invest in various types of asset classes to keep sufficient securities in your account.
When you are more often emotionally overwhelmed
When you work with high-leverage trading, you must accept that losses will happen, regardless of what you do. The only thing you can control is the amount of the loss by playing it safe and gaining more skill at reading market signs, but other than that, controlling your emotions is up to you.
Many traders have a certain period in their lives during which they invest more emotionally than financially into their trades, so they are deeply affected by losses and start chasing them, which is a considerable mistake as a high-leverage trader. Being overwhelmed by how good or bad your trades go will affect productivity and your capacity to improve, which is why frequent monitoring and more assessment of your condition might be the solution to fighting overconfidence.
These tools are useful in managing leverage
Even with high leverage, you can secure management pretty well with tools like a position size calculator, through which you calculate your position in units and find the reward ratio per trade. Another useful instrument is any risk management software that can help in identifying potential risks across the market, but the final decision is up to you. You can rely on tools that seize risks, but it’s always best to consider your risk levels and goals.
Finally, try having a trading journal in which you log each and every one of your trades with detailed aspects, including the stop-loss used at the entry and exit strategy, or the expected vs the actual winning rate. Your trading journal will act as a starting point for your evolution, from where you can learn more about yourself as a trader and what you could improve as well.
When is high leverage advisable
Low leverage is usually preferred as a beginner because you’re working with a small position size, and even if your profit is also smaller, risk is easier to manage. On the other hand, high leverage offers you more profit opportunities but exposes you to stress and risks. Still, there are times when high leverage is justified, such as in the case of short-term scalping, where going with high leverage when you enter and exit trades in a matter of minutes is actually beneficial for employing small price movements.
High leverage as a hedging strategy is mostly a professional method to hedge other positions in the same portfolio, while trading in highly liquid markets is mostly possible when the high leverage used can withstand the liquidity and tight spreads. Therefore, high leverage cannot be entirely avoided, but is best used by professionals.
There are risks to high leverage, such as the margin calls we’ve covered, but the amplified losses can truly be overwhelming when you’re a beginner. When the gains multiply, you risk exposing them to losses, especially when you overtrade, because you tend to take more trades than necessary, which supports unnecessary risks and exposure.
Conclusion
Leverage in Forex trading is essential to control your position, but its level can be more or less than what you need. Sometimes, you overtrade and mistakenly use leverage incorrectly, and you will see this when you’re getting more margin calls than usual, or when you face a stop-loss at unexpected values. While there are many precise solutions to this, it’s always ideal to use the right tools to measure risks and to become disciplined enough not to be emotionally disturbed by every loss.