High Leverage Scalping
Just had one of the questions come in that should you use high leverage when scalping?
It’s a good question, and the thinking behind using high leverage when scalping is that when price comes to a level, say for example looking at the Aussie/US Dollar at the moment, price moves into that support level and maybe you’re looking just to take sort of 10 to eight points out of the market, would it just make sense to use a very high leverage in order to maximize those potential gains?
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That’s the thinking behind that kind of trading and that you just take a few points, but by using high leverage you can still receive some decent gains. Now one of the issues with using high leverage, is that it effects your trading psychology when you start to use high leverage.
So let’s take an example, here, say for example you were using high levels of leverage and you decided that the market was in a right situation for finding buyers from this level.
We know that risk is currently on, we know that oil prices are up, copper prices are up, bond yields are up, equity markets are up, we’ve got strength across the commodity block of Aussie, New Zealand dollar and Canadian dollar. Weakness in Japanese Yen, Swiss Franc and US Dollar, so, we would expect to find buyers at this level. All fair enough.
So then you use your high leverage and let’s say, for the sake of argument, the price moves down through the support level and moves down to the next sort of major support level, down at the 6280 to 60 level.
Now if you’ve used high levels of leverage, the problem you’ll have, is that you’re now sitting 30 to 40 points underwater, and because you’ve used high leverage you are deep in loss.
Now, the psychology involved with doing this will mean you’re much more likely to close out the trade prematurely. As soon as price goes against you, maybe 10, 15 points, you might think well I’m just going to close out the trade and then you might look again and say well actually risk is still on so actually there’s no reason why this level should break so I’ll re-enter the market. And then you re-enter the market, and this time you pay two lots of commission for your trade and then say the trade goes against you after all and then you’ve just re-entered and lost extra money on top of the original you would have lost.
So can be tempting to use high leverage but actually the practical and the psychological difficulty of using high leverage will impact your trading results, it’s much better to do, as we’re recommending, is don’t use any leverage.
Allow your trade size to match your account size, so in other words, if your trade size is one standard lot that should match your account size of 100,000 units of currency, or if your account size is 10,000 units of currency then use that to match your trade size, so that would be a mini-lot, or one tenth of a standard lot, 0.10. So by doing that you can still aim towards double digit returns and achieve them and a lot less risk to yourself.
The danger of using that high leverage is it does create a vicious cycle of entering, re-entering the market, and then you’ll be tempted to use even higher leverage to try to make up for any potential losses. And then that will just become a vicious circle that repeats itself over and over again and will lead to ultimately insecurity in your trading.
It’s far better to use no leverage at all, use, as we’re suggesting here, find key levels to enter the market, key levels to exit the market, anchor your stocks well out of the price range and then you just close out the trade if the sentiment turns against you.
So we wouldn’t recommend using high leverage when scalping, it is a very advanced form of trading and particularly if you’re starting out, it will likely start a cascade of negative trading habits that you’ll find very hard to shake and will actually hinder your progression as a trader.