Leverage

Hello,

From what I understand you don’t need to include leverage into the actual calculation when deciding on your SL and the rest…

I even found an excel calculator and there was no Leverage box.

This totally puzzles me. How is that you can get “greater gains” or “greater losses” depending on the leverage size if you dont need to add the leverage size into the calculation?

For example how does the calculation tell you how much to risk and what your potential profits and losses are when you havnt even said "im using 1:10 leverage or 1:200 leverage?

I know im probably looking at this wrong but please explain to me.

Thanks

Exactly.

Your leverage is determined by your los size.

All the explanations you need can be found here.

Clint does a bangup job with the details:)

Thank you. I had been very confused about MM until I read that thread. Now I completely understand the calculations made from knowing what SL you need.

I understand now that leverage is the amount of money you “put aside as a deposit” for trading. and account balance/leverage = Amount of money needed in your account to keep trades open.
I understand that this amount is a factor and will be multiplied by X amount of lots in a trade. so 3% risk on my £1000 acount at 200:1 leverage means £5 is needed in the acount at all times as margin for 1 micro lot. A trade requiring 9 micro lots means my new margin is £45

I see now why a higher leverage is better. 50:1 would mean my £5 margin becomes £20 and 9 micro lots means for just 1 trade my margin is £180 :S

I’m not suprised most people fail at FX. I am good at maths and still took me a while to understand this … No wonder people just click buy and cross fingers haha

However I still dont understand 1 thing. I know that higher leverage is best but I dont know why its more risky? If its just “how much money is needed as margin” and the higher the leverage the lower the amount needed… why is higher leverage actually risky? for my trade example above I require £45 in the account. Surlely thats less risky than 50:1 and needing £180 margin…

EDIT

I think I now understand

If I have a micro acount and used 100:1 leverage, trading 1 micro lot would meanI get the profits from the full 1000 lot

If leverage is 200:1 then profits double.
If leverage is 50:1 then im really just trading a 500 lot

So now im confused. You base your calculations on your risk % and required SL. but if leverage of 200:1 doubles the reward or loss then im not risking I.E £30 but actually £60???

Should I stick with 100:1 :S
thanks

Looking at your edit leaves me thinking you’re still a tad in the dark.

If you opened a $100 micro account with 100:1 leverage, technically you should be able to trade one mini lot of 10000 units. But in actuality, the trade could never be opened because the spreade would put you negative immediately.
If you cut your trade size in half, and trade 5 mini lot, the result would be 50:1 leverage designated by your lessening of lot size alone.

Here’s a word of advice. Use your account size as your trade size.
Leverage is quite a carrot dangled by the brokers. As much as it can be your freind, it can also be your worst nightmare.

So, if you deposit $100 into a micro account, use only a nano lot, or $100 lot size.

Your used margin with 100:1 leverage would be $1.00, or in the US or Canada, with $50:1 it would be $2.

Your pip size would be +/- $0.01 depending on the pair you traded, and you would sleep better at night;)

If I have a micro acount and used 100:1 leverage, trading 1 micro lot would meanI get the profits from the full 1000 lot

If leverage is 200:1 then profits double.
If leverage is 50:1 then im really just trading a 500 lot

this is all wrong.
Leverage has nothing to do with the size of your trade, your profit or loss. The leverage that your broker gives you determines the maximum size trade you could make. The higher the leverage the bigger trade you can make. Thats it. a lot is the same size no mater what the leverage.

trading 1 micro lot would meanI get the profits from the full 1000 lot

correct.
on an account with 50:1 leverage the broker will lock up much more of your account as margin for this trade then they will on an account with 200:1 leverage. The trade value is the same so is your profit or loss. Your margin requirement is different.

EDIT >>
try this
Open up 2 demo accounts one with 50:1 leverage and one with 200:1 leverage. Make sure they have the same account balance. Make some trades on both accounts some the same size and some as big as you can. You will figure it out.

Ok thanks I understand now. Begs the question though. The school of Pipsology says if you have a micro account, to not trade more than 1 micro lot. Also says its not a good idea to use high leverages. If banks and professionals use maximum 5:1 then how do amateurs think thy can succeed with 100:1 and higher!

I saw some of the exprienced people like yourselves on this forum say to use 100:1 and higher. So there is contradiction here…

I also cannot see any worthy profits coming from a micro acount or even mini acount using 1:5 or less any time in the near future… I’d guess the professional can trade like this because of there much larger size accounts.

So what is the best leverage for new traders with say £500- £1000 accounts?

thanks

Leverage is in fact the maximun you can lose with opened positions. But don’t messyour head with it, if you risk only a small percentage in every trade then leverage must not scare you.

Regards.

One common misconception is that by increasing your leverage alone, you increase your profit/loss.

That is not the case.

Leverage only affects the margin requirement to open a trade.

eg.

Buy 1.00 lots EUR/USD @ 1.34113

The margin required to open the trade at various leverage levels works like this…

100,000 (1 standard lot) * 1.34113…

1:1 - $13411.3
1:5 - $26822.60
1:50 - $2682.60
1:100 - $1341.13
1:200 - $670.57
1:500 - $268.23

The value per pip of 1.00 lots EUR/USD is $10/pip no matter what leverage you use. Leverage just lowers the margin requirement thereby allowing you to open more or larger positions than you could if you had lower or no leverage. That is where the increased risk is in leverage.

The risk is your own. Whether you can resist the urge to go all in or trade conservatively.

I’ll try to give the original poster an answer to his question.

Me and you have £1000.

You open an account with 1:100.

You want to open 2 minis and your broker wants £70 margin.

You set a stop of 20 pips.

I come along and you tell me about your trade. I decide to copy it.

I open a trade and my margin is £70 and stop 20.

But there’s a problem. My leverage is 1:700.

So instead of 2 minis I bought 1.4 std lots with the same margin.

Even though we both have same stop. I lose 7 times what you lose per pip.

If I really copied you I would have only needed a margin of £10 (7 times less cos of my leverage).

My mistake was inspired by thinking the risk I was taking was based on the margin (7% £70/£1000 * 100) when risk is what is on the table after a loss which is 20 pips on 2 minis which is around £40 basically or 4% of your £1000 balance.

Leverage allows people to enter bigger trades for smaller deposit and over expose themselves and for professionals it allows them to control more trades as higher leverage ties up less money.

Just because I put down £70 for opening like you doesn’t mean we are risking the same. 1.4 std lots at 20 pips is basically £280 pips on the table or 28% of the balance of £1000.

Hope that helps.

Oh, about banks or big funds using 1:5 you got to consider a bank can trade 100 std lots which is £1000 a pip or £20000 on the table. With trades like that u want to be sure that more capital is locked in to cover counterparty risks brought about trying to cover the other side of the trade and to provide a higher down payment against a potential loss.

ah… I see. So the higher leverage lets me open more smaller trades and also if I wanted to, go for a larger lot size on trades as the margin is less.

So the only reason its a higher risk is because I can chose a higher lot size and therefor… bigger profit or loss. So leverage does not directly effect anything. Only your decisions do.

I will probably go with 200:1 and just be careful on my lot sizes. With a smaller account I dont want to spend 5 years to make any kind of decent profits using 10:1 :stuck_out_tongue:

That’s odd… I make GREAT profits using 10:1.

I still think you’re missing something.
Play around with it, you’ll figure it out.

1:10 vs 1:200 doesn’t affect your profit per se.

But it could take a guy on the 1:10 account 20 times as long if they earn/spend/owe the same to get/save the money needed to control the same trades and exposure to risk as the 1:200 guy.

If they both win, they win the same.
If they both lose, they lose the same.

Difference would be that that 1:10 guy has more liquid/real capital lying around than the 1:200 who has 20 times less but decided to get into forex early thanks to leverage.