Quote:
Originally Posted by 0074xnz
Suppose I have $10000
I buy 1000 units of EURUSD @ 1.000
Pip value = $1
@ 1:1 leverage, my margin used = $10000 = 0 pips "breathing room" before margin call.
@ 1:2 leverage, my margin used = $5000 = 5000 pips "breathing room" before margin call.
@1:10 leverage, my margin used = $1000 = 9000 pips "breathing room" before margin call.
@1:100 leverage, my margin used = $100 = 9900 pips "breathing room" before margin call.
@1:200 leverage, my margin used = $50 = 9950 pips "breathing room" before margin call.
It seems that the higher my leverage, the more breathing room I have, so can withstand greater market fluctuations. Wait... after typing that and reading it over again, I see that if I do get margin called, I would lose more the higher my leverage... that must be the disadvantage...? Hmm... lol maybe I answered that question myself  |
You've actually got your leverage figures quoted backwards from what is normally done. Using 1% margin is 100:1 leverage. Minor point, but important to avoid confusion.
If you buy 1000 units of EUR/USD at 1.00 the value of the position is $1000. If you have a $10,000 account through which you are making that trade, your effective margin ratio is 1:10. By that I mean you are making a trade worth 1/10th your account value. You wouldn't be employing leverage at all.
With that in mind, here is what your "breathing room" before reaching a margin call would look like at different leverage settings:
1:1 (100% margin) - 9000 pips
2:1 (50% margin) - 9500 pips
10:1 (10% margin) - 9900 pips
50:1 (2% margin) - 9980 pips
100:1 (1% margin) - 9990 pips
200:1 (0.5% margin) - 9995 pips
Here's the double-edged sword part.
For any given gain or loss you multiply it by your effective leverage. So if you were to make/lose 10 pips on a trade and were at 100:1 leverage the account value change would be worth 1000 pips.
Notice that I said "effective" leverage. That means the size of the position in relation to the size of your account. If we use your example of a $1000 position on a $10,000 account, that's a 1:10 leverage, so you would actually divide the pip move by 10 to get the account value change.
Hope that helps.