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What does leverage really mean?
Let`s see what leverage actually means.
The average daily fluctuation of prices for the euro-dollar currency pair is 0.28% based on the results of trades for the last year (from April 01, 2011 to March 29, 2012). This means that your $ 1,390,000 investment experiences average fluctuations in value of about $ 4,000 every day, either plus or minus.
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This also means that about two and a half days of average unfavorable one-way movement for you is enough for you to have absolutely nothing left of your $ 10,000 bill. Your position will be closed, despite the fact that in the future you could possibly make a profit. These are the rules.
[When the critical level of losses on the client`s open position is reached, the broker has the right to close it at the current market price forcibly. ]
In the considered case, when the client has an account of 10,000 dollars and a leverage of 100, the exchange rate only needs to change by 0.01 (0.01 = 100 pips = 1 figure, 1% = 1 / leverage), i.e. from 1.390 to 1.400, so that your position is forcibly liquidated by a forex broker and you are left without money. With a leverage of 50, the situation is somewhat better. Prices should change in the negative direction, not by 1%, but by 2% = 1/50, which is 200 pips or two figures, in the terminology of currency speculators. However, even in this case, your position would have been closed after only two days. A price movement for a figure or two is not such a rare event in the forex market (see https://nsbroker.com/investment-strategies/simple-forex-scalping-trading-strategy for reference).
The fact that it is almost impossible to make money on the forex market with a leverage of more than 20, even having correctly predicted the direction of movement of the exchange rate in the medium and long term, unfortunately, is a statistical fact following from a simple mathematical modeling of the movement of the rate. It does not matter at all whether you assume this movement of rates at the micro-level is fractal or purely Brownian.
The sadness of this fact stems from the randomness of the pricing process on the one hand and the limited resources you have when working with leverage on the other. Whichever direction you open a position when trading with leverage, sooner or later you will lose all your money. And no risk management, no money management can save you from this catastrophe. The only question that can be posed is: with what probability and for how long does a complete loss of all funds occur?