Mine is Small – How About Yours?

In trading size matters, but in the exact opposite way that it does in real life.

I am often asked by traders what is the proper leverage -- 100:1? 200:1? And I am always amused by their shocked reactions when I tell them that I trade at 2:1 lever size. That’s right for every $5000 worth of capital, my opening trade size is no more than 10,000 units. Now I may hold 2 or 3 trades at once and perhaps several positions in the same trade, but my OVERALL leverage NEVER, EVER exceeds 10X my equity, In fact, 95% of the time I try to contain my open positions to no more than 5X of my equity at any given time.

That’s a lesson I learned from the school of hard knocks after having burned more accounts than I care to count on lever factors that may seem quaint to most of you (10:1, 20:1).

The single truest fact in trading is that large size kills. There is a reason why FX dealers extend such high leverage to their customers. The law of large numbers assures them that 99% of traders will lose all of their capital due to margin calls.

Keeping the lever factor to just 2:1 on any opening trade will ensure that your account will not blow up due to one badly timed trade, but it will in not you profitable. It could just keep you afloat longer, but you may still drown due to a death by a thousand cuts if you take random, impulsive trades.

My 2:1 lever is actually reserved for my best trade ideas -- the “true” trades -- for those of you who have been reading my columns of late. For everything else -- the let-me-try-this-cause-I-am-bored trades I use a size that is 1/10th my “true” size which for a $5000 account amounts to just 0.01 lots.

Those are not serious trades -- and that’s precisely the point. I found out from my past experience that it is the frivolous trades that suddenly turn deadly serious as you battle for the value of the account. Trading 1/10th size never puts me in that unnecessary situation, while allowing me to blow off steam or try new setups with minimal risk.

So I leave you with this final tidbit of advice. Metatrader defaults its size to 1.00 lot or 100,000 units. If you are not careful, you can point and click and execute a trade size much larger than you intended. To avoid this problem forever go to Tools>Options>Trade Tab and change the default volume to 0.01. You can always increase the size manually later on, but if you do this now -- you will never be subject to that sinking feeling of -- what did I do now?
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Just as in cooking, you can always add salt, but you can’t remove it. In trading, size can always be added but once the trade is done -- you can’t be undone once the button is pushed. So stay small, stay safe and trade well.

Boris Schlossberg

5 comments

  1. maylin says:

    many thanks – u have absolutely articulated what i have experienced in the earlier days, and could still do, if i am not reminded 🙂

  2. Ditto Boris. Leverage can put Traders and Brokers out of business. Look back at what happened when the Swiss National Bank removed the Franc’s peg to the Euro. The key to becoming a good trader is trade size (leverage) and money management.

  3. techboy says:

    Sir, I agree that over leveraging will kill one’s account but 2:1 is just too small for a 500$ or less account, in my humble opinion we cannot totally blame leverage why traders fail or got a margin call, for me it is all about mental and technical skills that matter first, because if you dont possess such skills you will still end up having a margin call even if you use a 2:1 leverage. Good luck and more power!

  4. Houg says:

    In para 6, you mentioned about $5000 in 0.01 lots,the money is the account size?or otherwise?

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