FXCM Basic Account - Leverage question

Inchaos · February 11, 2014, 12:57pm

Hi, I’m new to Forex trading. I’m a little confused here.
I just opened a FXCM basic account with 100$, but I was not told to select any leverage in the opening process, where can i check my leverage?

PipMeHappy · February 12, 2014, 11:34am

[B]Dear Inchaos,

I am in no way as knowledgeable or qualified as Jason Rogers, nor do I have any FXCM endorsement to answer user questions; however, Jason posted a reply on one of my threads, recently, which explains this topic in some depth and, therefore, answers your question; for this reason, I am taking the initiative to quote it here:
[/B]

Jason_Rogers:

2 things:

[B]1. Effective Leverage vs. Maximum Leverage:[/B] FXCM does not have a “fixed 200-to-1 leverage”. Rather, our minimum margin requirement (MMR) for opening a trade allows you a maximum leverage of approximately 200:1. For example, as you can see in the Simple Dealing Rates window of Trading Station (shown below), the MMR for GBP/USD is £5.00

Since the minimum trade size is 1k GBP/USD, that means you can control £1000.00 in the market and only have to set aside £5.00 as used margin (Usd Mr). That means each pound you set aside can control £200. So your maximum leverage is 200:1. That’s not to say you should use all the leverage available to you, because that would leave you with no usable margin (Usbl Mr) to withstand drawdowns.

(Usable margin is what’s left of your equity after subtracted the used margin that has to be set aside for open positions. So if you have £600 in equity and with one trade open for 1k GBP/USD, then your usable margin will £580 after setting aside that £20 used margin. If you lost that £580, then your usable margin would drop to zero and the system would automatically close out your trade to prevent further losses.)

Since it’s not wise to max out your leverage when trading, what’s important to consider is what effective leverage you want to use. For example, with £600 in equity and one trade open for 1k GBP/USD, your effective leverage is 1.667-to-1 (or £1000/£600). If you have 2k open, then your effective leverage would be 3.333-to-1 (or £2000/£600). Personally, I try never to exceed 10-to-1 leverage on my account, so with £600 in equity, I would never open more than 6k total. Otherwise, I might be risking too much relative to the size of my account.

[B]2. Equity vs. Balance:[/B] As I mentioned before, balance is really a look into the past. I don’t pay attention to that column in my accounts window at all. Much more important is the Equity column. That is the real money in your account. Based on what you’ve said, I would say that you’re up £64.00 (still fantastic!) not £102.39.

[B]
I hope this helps![/B]

Jason_Rogers · February 13, 2014, 1:37pm

Thanks, PipMeHappy! I couldn’t have said it better myself :22:

Hi Inchaos,

Welcome to BabyPips!

The key point here is that it is your effective leverage, not your maximum available leverage that determines the risk you are taking with your account. Just like the speed you are driving matters more than the top speed of your car in terms of safety.

As a general rule of thumb, try not to exceed 10:1 effective leverage on your account. That means if you have $100 in your account, you don’t want to control more than $1000 total in open positions. That equates to 1 micro lot (1k) which is the smallest trade you can place in your account. On that trade size you’re risking approximately 10 cents per pip.

You might want to look at the studies by DailyFX analysts into trader profitability for more info on effective leverage.

Jason