Ah! Thank you for that .. finally I think I understand leverage and what true leverage means .. I mean, I knew the definitions but did not fully get how they worked in practice.
Did you see the spreadsheet I made? traderstar dot com/excel-link.htm.
Maybe you could check it out & see if the formulas are correct, I think I am almost there. If so, this could be a useful tool to help people figure out how many lots they can own or how much dd they can take based on acct size & leverage.
Quote:
Originally Posted by trav72
There is two types of leverage.
The leverage to open the position (ie deposit required) be it at 100:1 or 400:1, all is different is your deposit ie 1% of lot size or .25% of lot size. The pip value is the same for both. so the risk the same...you will make or loose the same amount of $ regardless of leverage.
Then there is true leverage....which is different,
That is the leverage of your account in relationship to your open position.
The broker platform wont tell you this, the broker figure is for the one above, this true leverage is something you calculate yourself...if you want...i dont...but it is true here that the higher leverage the greater risk, because your account isn't as big as your open position.
if you have $1000 account balance: and you open a $10000 lot (pip value=$1) your true leverage 10:1 but you may be using the 400:1 broker leverage to open the position so you deposit the $25. Therefore you have $975 left to lose/risk.
If you have $500 account balance: and you open a $10000 (pip value=$1) your true leverage 20:1 but you may be using the same 400:1 broker leverage to open the position so you deposit $25. Therfore you have $475 left to lose/risk.
Therefore the higher true leverage the more risk.
The higher broker leverage then just means less deposit, more margin available to play with..open positions etc..
True leverage is where the risk is associated.
If your true leverage was 400:1 it would mean you would be opening a $10000lot with only only $25 account balance, so as soon as you open the position with the brokers 400:1 leverage it would cost $25, therfore your balance would be $0.
if you used the brokers 100:1 leverage you couldnt even open the position cause you would need $100 deposit (ie account balance would be -$75 to open position
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