Please help with leverage

[Toka]

Hi guys,

my first post so here goes,

I would like to see if i understand leverage correctly so, could you tell me if the following statemants are true please:-

1. If i open an account with £1000, this means that i can buy 1 standard lot with 100:1 leverage.

2. At 1 standard lot, each pip is worth £10

3. If i buy my 1 standard lot as above and the price swings 100 pips against me, my account will be empty and so my broker will stop the trade instantly.

4. If i buy my 1 standard lot as above and the price swings 99 pips against me, the trade will remain open.

5. If i buy my 1 standard lot as above and the price swings 50 pips in my favour and i then close the trade, I will now have £1500 in my account minus spread value.


Sorry if these questions are really stupid but i recognise the importance of getting it right before trading. I have read loads on it but still unsure


Many thanks for any and all help

[Sweet Pip]

Originally Posted by Toka

Hi guys,

my first post so here goes,

I would like to see if i understand leverage correctly so, could you tell me if the following statemants are true please:-

1. If i open an account with £1000, this means that i can buy 1 standard lot with 100:1 leverage.

2. At 1 standard lot, each pip is worth £10

3. If i buy my 1 standard lot as above and the price swings 100 pips against me, my account will be empty and so my broker will stop the trade instantly.

4. If i buy my 1 standard lot as above and the price swings 99 pips against me, the trade will remain open.

5. If i buy my 1 standard lot as above and the price swings 50 pips in my favour and i then close the trade, I will now have £1500 in my account minus spread value.


Sorry if these questions are really stupid but i recognise the importance of getting it right before trading. I have read loads on it but still unsure


Many thanks for any and all help

Leverage only affects the amount of your account balance your brokers holds aside for each trade you open. The higher the leverage, the less the broker holds so you can open more trades. The lower the leverage, the more the brokers holds thus limiting the number of trades you can open.

At 100:1 the broker holds $1000 from your balance, so you can only open 1 trade. At 200:1, the broker will hold $500 so you could open 2 trades. However, in the first case you'd have to lose 100 pips in 1 trade to get a margin call...in the second, if you lost 50 pips in each trade (or a combined total of 100 pips between the 2 trades) you'd get a margin call...big difference depending on your stoploss strategy in how much room you can give each trade to move in and if 50 pips is not enough, then your win ratio may suffer.

[Toka]

Wow, quick reply......thanks for that.

So on point 1. I am correct. So does that mean that I'm correct on all of the other points also?

BTW
I am not considering this as part of my trading plan!!!!!!! Just want to clarify that I understand it properly.

[Sweet Pip]

Originally Posted by Toka

Wow, quick reply......thanks for that.

So on point 1. I am correct. So does that mean that I'm correct on all of the other points also?

BTW
I am not considering this as part of my trading plan!!!!!!! Just want to clarify that I understand it properly.

Yes the other points are correct. Whatever your leverage is, the pip value will always be approx $10 per standard lot.

For margin calls, some brokers will advise you when you get too close to a margin call and require you to replenish your account to get out of the "danger zone", others won't and just close the trade. Some may wait until you've lost it all, and others may close the trade leaving you a little bit. Check the brokers rules.

[rhodytrader]

Originally Posted by Toka

2. At 1 standard lot, each pip is worth £10

Pip values are fixed only when the quote currency (second one in the pair) is the same as your account base currency. Otherwise they are variable.

3. If i buy my 1 standard lot as above and the price swings 100 pips against me, my account will be empty and so my broker will stop the trade instantly.

Actually, your broker will margin call well before your account is ever emptied. How much of a loss that would be depends on your broker's policy there.

4. If i buy my 1 standard lot as above and the price swings 99 pips against me, the trade will remain open.

Probably not. See above.

5. If i buy my 1 standard lot as above and the price swings 50 pips in my favour and i then close the trade, I will now have £1500 in my account minus spread value.

Depends on the pip value of the pair your trading. If you're trading EUR/USD, for example, the pip value for a standard lot is $10. At current rates, however, that's only about £5.95.

[Toka]

Ah I see.

So basically I have it right but I just need to learn the finer details

Thank you both for taking the time to help me out, it's much appreciated