We all know that leverage has an immense benefit for trading. Particularly in the retail trading industry, without leverage, we can’t even imagine. Back in the 1900s, retail trading became possible just because of leverage.
But, leverage is a double-edged sword for traders. When trading in volatile markets, mostly on CFD markets, like “commodities” and “indices”, high leverage will blow your accounts. In these times, low leverage will allow you to be exposed to the benefits of leverage, but not to its potentially overwhelming dangers.
By reducing leverage, we are not binding our traders from using higher lots. Rather we are giving them more room to be profitable for a long time.
Our Thought On Low Leverage For CFD Markets
Here, we are going to discuss why we, FundedNext are encouraging and offering traders to use low leverage for Indices and Commodities.
Low Leverage Keeps Small Losses
The main reason to use low leverage is to limit traders’ losses. As leverage increases your trading capital for huge positioning size, still, your losses will count from your original capital outlay. From our long statistics, we have reached this decision, that most of the losses were made by over lot size.
Let us share a live example from one of our traders. He used our $100K evaluation plan in phase 1, he traded US30 and GOLD. As we are giving 1:200 leverage in commodities and indices, he executed a whopping $20,000,000 worth of position with the mentioned leverage. When the market moved just 0.05% against him and he hit the monthly loss limit. For the 100K account balance, our monthly loss limit is 10% which is $10,000 (0.05% of 20,000,000). Effectively, your all 100 days of work are gone in one trade.
However, if the trader trade with an account of 1:25 leverage, he will survive on this move. A 0.05% move against him will result in a loss of only $1,250. He would still have $8,750 in his account and apparently more chances to recover on that day.
Small Losses Are Easy To Recover
As you are trading in financial markets, losses are inevitable. You can’t ignore it. The more you are successful as a trader, the more your losses are small than your profitable trades. Low leverage allows you to be able to recover your losses as easily as possible. From the previous trader’s story, you all understand how high leverage blew his account in one trade in a very short time.
Let’s view this story from a different perspective. This time the trader starts the account with 1:25 leverage on indices and commodities. He can still manage a position worth $2,50,000 with the mentioned leverage. This time he will only lose $1,250 instead of
$10,000 from the same move of 0.05%. Now, to get back to his initial balance, he only needs 1.25% profit on top of his $98,750 balance.
Lower Transaction Cost from Lower Leverage
So, now you are thinking that low leverage not only helps you to stay in the game for a long time but also helps you to recover your losses easily. Now, let’s discuss how low leverage can drastically lower your transaction fees. Typically, spreads are very negligible when trading CFD markets. However, with high leverage, the costs can add up and limit your profitability. Lower leverage helps you to keep the transaction costs low and prevent them from eating into your profitable trades.
Let’s get back to the story to go through one more time, how high leverage increases transaction costs. On average, we are offering 1.5 points of spreads on indices and commodities. With a very high lot size, that trader is giving approximately $1,000 on the spread. Even before the market starts moving the trader losses of 1% of his account.
On the other hand, a similar trader with low leverage will give approximately $125 on the spread. This is a very small percentage like 0.125% on his account balance.
As mentioned above, lower leverage ensures that you don’t need to worry about transaction costs consuming part of your profits. This has multiple advantages in your favor. You can implement aggressive short-term trading strategies, such as scalping where you can open multiple trades and close within a trading session. You can trade during a volatile trading period like when London and New York session opened, where the spread became widely increased.
Additionally, you can open multiple positions in different markets without worrying about the spread.
Stress-Free Trading Experience
Trading is stressful. We all know how trades hit our emotions and wake us up hundreds of nights. While trading on CFDs, the emotion hits us more aggressively. However, while emotions are controlled, we can trade more effectively based on what the market is telling us. This has only happened when your losses are small.
You are more likely to succumb to bad emotions such as fear, greed, and bias when you trade on an over-leveraged account and stare at your losses to recover that soon. Then you take a trade with a very high lot size. And boom! your account is gone.
While trading with low leverage, you won’t face this situation where you experience big losses. You are going to have a stress-free trading experience when your losses are small. And you will consistently make objective trading decisions in the market. In this way, you can gain a mental edge in the market, and prevent negative emotions from getting in the way of trade executions.
The story we have shared above is not anything foreign or happens once in a while. This is the story of most of the traders under FundedNext’s banner.
With high leverage and with high lot sizes, many complete their challenge phases with a few trades.
As you know, that’s just pure gambling and totally depends on luck. As a result, those traders blew their real accounts within a very short time with a few trades.
FundedNext wants to give you the best experience in trading, not the stress that comes along. To stay with traders for a very long time in a mutually beneficial relationship, we are reducing our leverage on CFDs only. For forex, it will remain the same.