Hello,
I would like to ask about leverage, how does it works? I opened an account in xm.com and put some $235, i need an advise how much the desirable leverage to work for this amount?
The smallest position you can open in this account is 1 micro-lot. That’s 1,000 units of base currency.
Let’s say you trade 1 micro-lot of USD/CAD, or USD/JPY, or any other pair in which the USD is the base currency.
In that case, you are trading $1,000 in base currency with an account balance of $235, and [B]you are using 4.26:1 actual leverage[/B] (1,000 ÷ 235) – regardless of the [I]maximum allowable leverage[/I] associated with your account. Using 4:1 or 5:1 actual leverage in a beginner account is acceptable, but you should not exceed that range, in my opinion.
More on [I]maximum allowable leverage[/I] in a moment.
If you trade 1 micro-lot of EUR/USD, or GBP/JPY, or any other pair in which the USD is not the base currency, then the notional value of your position will be something other than $1,000, and the actual leverage you are using will be something other than (but close to) the 4.26:1 calculated above.
If you have the option of setting the maximum allowable leverage on your account, set it as high as you can.
[B]High maximum allowable leverage is good, [I]as long as you don’t use it.[/I][/B]
Maximum allowable leverage is a limit on the leverage you may actually use. Like the credit-limit on a credit card, maximum allowabe leverage cannot be exceeded, and it should not even be approached. It’s there to save you, and to save your broker, from total folly on your part.
Welcome to this forum, by the way!
.
Thanks you for the reply, i trade gbp/usd and eur/usd on my account and i setted up into 1:100 leverage. I came up here becoz i want to know how leverage works, i read some comments leverage can drain your account in just a single trade. On my settings, the maximum leverage is 1:888.
Is it ok with 1:100 set up?
My account is micro lot
GBP/USD currently trades around 1.2200, which means that the smallest position you can take in GBP/USD is worth $1,220 (approximately).
That’s 1000 units (one micro-lot) of base currency (GBP) x $1.22 per GBP.
A position which is worth $1,220, in an account with a balance of only $235, is a position that’s using [B]actual leverage of 5.19:1[/B] (that’s 1,220 ÷ 235). That’s pushing the [I]high end[/I] of what I consider to be prudent leverage for a beginner.
Consider adding additional funds to your account, and continue trading micro-lots [I]one at a time.[/I] That is, do not trade one micro-lot of GBP/USD and one micro-lot of EUR/USD at the same time.
Your question about [I]leverage draining your account[/I] shows that you do not yet understand the difference between [I]maximum allowable leverage[/I] and [I]actual leverage used.[/I]
[I]Maximum allowable leverage[/I] cannot drain your account. It is only a limit on what you can actually use. And yet, you keep asking about how high to set your maximum allowable leverage, and fretting about whether it can drain your account.
Only the careless use of [I]actual leverage[/I] (or trading with a ridiculously large stop-loss, or no stop-loss at all) can drain your account.
If you use actual leverage of 4:1 or 5:1 (or thereabouts), as in the example trades described above, then it doesn’t matter whether your account has a leverage limit of 100:1, or 1,000:1, or a million-to-one.
You need to concentrate on understanding the difference between maximum allowable leverage and actual leverage used. And you need to specify the type of leverage you are referring to, whenever you discuss leverage.
.
Got it, really appreciate your reply. I need to learn about fx more. Kinda interesting.
Have you any demo trading experience or not? I seem, you opened your live trading account directly and that’s way now you are confused! Whatever, I have opened my live trading account when I was very sure about my own trading skill, listen I am not demotivating you, I’m just telling you the right way! Forex trading is a very sensitive profession, so be responsible and always try to depend on your own trading decision and choice! Best of luck!
The less is leverage the better for you. Small consistent gains and controllable risk is what will save you from frustration.
True that! Even I would suggest not using a very high leverage. Leverage can put a trader under higher risk as the magnitude of potential losses increases on account of leverage. Traders with the high leverage get a bigger shot at making the most out of the good trade call. But during the bad trade phase, leverage works against us and eats up significant part of margin.
I prefer the conservative approach, save your powder and stay in the business. Being reckless with leverage is the quick route to disaster. (from personal experience)