Using leverage and liquidity

Here is how this strategy would work. Assume that you have $10,000 of trading capital. Deposit only $2,000 of capital with your FX dealer. Keep the rest in your bank account. With 100:1 leverage, which is standard in the FX market, you will have 100 points of leeway before you get a margin call in EUR/USD. (Trading other pairs the margin requirements might be different, so consult with your dealer before attempting this idea on other currencies.)

If the trade moves against you, an automatic margin call will instantly take you out of the market. Dealers will not call you in advance and warn you of an impending margin call like they may do in exchange-based futures markets.

Rather, the dealer’s software program will automatically liquidate your position. This may seem a bit brusque, but the upside of such an arrangement is that your account should never experience negative equity and your total risk should be limited to the amount you’ve deposited. The margin call will then act as a de facto stop on your account. If a margin call is triggered, your account should have approximately $1,000 of equity left: $2,000 initial deposit $1,000 loss on trade ($10 * 100 points at 100:1 leverage) = $1,000.

Deposit another $1,000 from your bank and trade again once your setup is triggered. You can repeat this process up to nine times before you run out of your trading capital.

Will you lose most of your money? Perhaps. Remember, this is a very low-probability trade. But at least by subdividing your capital into 10 equal pieces you’ve given yourself the best opportunity to succeed. This strategy is basically a more intelligent variation on the old trader saying, “Have a hunch, bet a bunch.”

Let‘s imagine, however, that on one of the trades you were successful and caught the large directional move. If that’s the case, you could employ the trade management strategy discussed before and continuously add to your position as prices move your way. In the best of all possible scenarios the trader could eventually build up a large position, perhaps 10 lots or more (with notional value of $1 million), that could be 1,000 points in the money. In that case the profit on the trade would grow to $100,000. Not bad for $1,000 of initial risk.

As I’ve already noted, this strategy is not for the faint of heart. This is a very high-risk, (potential) high reward strategy that requires a unique mindset and proper trade management techniques to succeed. For those inclined toward a more steady approach, here is a completely different trade methodology and one that I employ myself.