The Nature and Risk Analysis of Leverage in Trading

From a special perspective, finance is the future of overdraft. Whoever does well and who does poorly is nothing more than who can overdraft the future more scientifically, and the future of overdraft itself will always exist. Due to human nature, some people have rivers and lakes. And leverage is the tool or rule that people define in order to overdraft the future. We can look at it from both the perspective of traders and traders:

trader

The more formal traders, the less likely to provide high leverage, even if there is, it is a step, for example, for small fish and shrimp retail investors, give a high leverage, but the amount of capital reaches a certain order, the leverage will be forced to reduce. Because once the "crossing" occurs, traders have to lose money to the liquidity provider behind, so the better the dealer, the less they will put themselves in risk exposure, risk control is stricter traders even give 1:1 leverage to large capital clients (that is, can not use leverage), so that never cross the position, traders will always be invincible, not afraid of black swans. This is the dealer's own risk management.

And regular funds (or asset management, or customer wealth management) will definitely choose a good dealer, and a good dealer will not provide high leverage to large capital clients at all.

trader

For traders, the amount of leverage can be said to have nothing to do with risk. This sentence may be subversive to many people, right? And listen to the reasons:

Note: Any point of view stated here is based on the premise of light positions. Any successful trader, there is no light position, if heavy positions, you can make a hundred consecutive profits, but only once is enough to be swept out of the market. "Often walking by the river, you will inevitably get wet shoes" should be a trader's permission. Therefore, this article is only for traders with light positions. Heavy positions are not discussed, and they must explode.

Risk comes entirely from the trader himself

For example, jumping out of the first floor will be fine, but jumping out of the 10th floor will kill you, so the 10th floor is more dangerous than the first floor? The key is why you jump off the building when you are on the 10th floor, no one forces you to jump, can't you take the stairs? The risk is all created by yourself, and everyone is drunk!

Take the gold varieties of the MT4 platform as an example. For those with three quotes after the decimal point, the number of open positions = [current net value * leverage * 10]/[ (1000 * current exchange rate) + (resistant points * leverage) ].

From this equation, it can be seen that no matter how high the leverage is, you can also maintain a light position by expanding the "resistant points", which is completely under the control of the trader. Leverage is only one of the factors that determine the lot size, and there are other factors that can be controlled. Roughly speaking, A/B = C, if you expand A by 100 times, but also expand B by 100 times, the result is still C, and the initiative is entirely in your own hands.

Under the premise of light positions, the impact of leverage on the number of counterparties is minimal

According to the opening lot formula, we can calculate the account, assuming that the net value of the account is $1,000,000, the exchange rate at that time is 1246.052, and the anti-point is 300,000 points (the last digit after the decimal point is defined as 1 point, and the anti-300,000 points are actually quite radical for professional funds). For 500 times leverage and 50 times leverage, the calculated opening lot is 33.06 lots and 30.78 lots, respectively. It can be seen that the leverage has been reduced by 10 times, but the change in the final opening lot is minimal (the leverage is equivalent to being approximated).

Note: Only in the case of very low leverage, such as 5 times, will there be a significant decrease in the number of open lots, which is calculated to be 18.21 lots, because the relationship between the size of the leverage and the number of open lots is an exponential function curve, which is not linear. Leverage is reduced by ten times from 500 to 50, and the number of lots is reduced very little, but from 50 to 5, the number of lots will be reduced by ten times.

Therefore, for regular funds (or asset management, valet wealth management, etc.), light positions are certain, so the size of leverage basically does not need to be considered, and it will not affect the transaction. (If the value of heavy positions, that is, "resistant points" is very small, the change in leverage will have a much greater impact on the change in the number of counterparties, but because of this, it will not be discussed.)

To sum up, for light traders, the amount of leverage has nothing to do with risk - the number of lots to trade is entirely up to you, and the level of leverage has little impact on the number of lots to open.

What exactly is leverage used for? The essential function of leverage is only responsible for strengthening the degree of trading results, promoting the speed of success or failure - if you win, you will increase the results; if you lose, you will accelerate the loss. In layman's terms, you earn faster when you make money, and lose faster when you lose money, so that you can reveal your true colors as soon as possible.

But leverage does not change the nature of the outcome, making a profit does not turn into a loss, and losing does not turn into a profit. Success or failure depends only on the trader's philosophy and operation, and has nothing to do with leverage. It is just an auxiliary tool.

In reality, leverage is often labeled as a negative. In fact, even in transactions without leverage, the vast majority of people lose money. When people fail, they always find some excuses for themselves and put the blame on leverage, so leverage becomes a scapegoat. As mentioned above, even with high leverage, other parameters can be adjusted to control risk. Only gamblers regard high leverage as a gambling tool.

In fact, from a macro perspective of life, high leverage is beneficial - enabling those who can make money to make money faster, and those who cannot make money to lose money as soon as possible, sober up in time, and realize that they are not suitable for participating in this market, and invest their time and energy in other things as soon as possible. If high leverage can lose money in one year, but it takes ten years to lose money because of low leverage, although it will not be suddenly hit in the short term, it is catastrophic for life - the end is the same, but more lives are spent engaging in meaningless things.

However, from a political perspective, the state will definitely advocate low leverage. Even if the state knows that long-term pain is not as good as short-term pain for traders, it still hopes that the majority of traders will survive the warm boiled frog effect of low leverage to avoid short-term losses and maintain social stability.