Deleveraging brings your risk factor down
Yesterday we looked at the impact of leverage on risk management and today we will be covering one of the key benefits of getting your use of leverage under control. In fact if you are struggling to trader successfully , one of the best immediate steps you can take to lose less money is to remove your use of leverage. Over time this will help address some of your bad habits and give you the mental space to think more calmly and logically. As an incentive, one of the extended benefits of doing this is that, if you aspire to trade a large account on behalf of other people, is that it will allow you to attract high net worth clients.
Attract high net worth clients
The first benefit is that it allows a professional trader to attract and retain high net worth individuals and accounts. This is obvious when you think about it. Let's look at the following hypothetical situation. Imagine that you have been entrusted with a $200 million account to trade with. Now, imagine, that through using leverage you have a losing trade that loses 10% of your account. Now, let's say that for the next two trades you lose a further 10% of your $200 million account. Let's say those three losing trades happened in one week. Three losing trades in a row is not an unusual occurrence for any professional trader. It happens. Now, that trader would have to tell their employer and their client that they have lost over $40 million in one week. Enduring that kind of loss is an unbearable mental toll on both the trader and the client.
A professional trader who traded in this way would be removed from their post and clients of high net worth would not be prepared to risk so much of their money in this way. So, when you stop using leverage you are showing yourself to be a trustworthy trader who can manage risk in an acceptable way. Say, in the example above, that instead of risking 20% of their account , the trader had not used leverage and only risked 0.60% of their account per trade. Their total loss would only then have been 1.8%. That is a an acceptable loss for three losing trades in a row, especially when the winning trades inevitably come along again. If you aspire to be a forex trader, showing that you can manage accounts in a responsible way is crucial in attracting high net worth investors and will be a key factor in your personal success. If you aspire to become an online forex trader, then managing your risk is a key factor you need to master.
Tomorrow we will consider a second benefit of deleveraging.
