Hello everyone! I would like to say first of all that this website has really helped me better understand the Forex world and beyond that it has even given me a thirst for learning more everyday. It’s like it’s never enough knowledge and I suppose that the more you learn the greater your chance of success is. While I have learned quite some useful information these last 6 months (that’s when I started learning) I am not yet ready to swim in the pool for the first time and still have some questions that need to be answered. For instance, leverage still seems a vague subject to me.
Perhaps my lack of understanding is not so much focused on the definition of leverage but more on it’s actual everyday use. How is it that leverage happens? If someone could tell me every steps of the way that would help. I think that some example (not theoretical) of the steps one needs to take to enter a trade would help me. I have been trading on a demo account now for about the same time I started learning. As you have probably guessed I am now way better than what I used to be. But still, to succeed in Forex you need to have a proper system and stick to your rules and more importantly you need good money management. I have done the first part, now before even thinking of investing one cent, I need to be crystal clear on the second part.
I would appreciate if someone could tell me precisely how leverage is used. For example, a guy name Peter decides to open an account and puts 10 000 $ in it. He decides he wants to use some leverage and therefore uses a 10:1 to open a standard account.
Right there I need to understand something. Is this chosen before opening an account? Or leverage can be changed later on? My other question is since Peter only has 10 000 and takes a 10:1 leverage his account would now have 100 000. But the margin cost for such leverage is 10% thus his initial 10 000$. Therefore how can he even perform any operation if his usable margin is 0$ (used margin is 10 000$)?
I know that this must be very confusing for all of you and perhaps I’m explaining it so badly that I’m the only one that can understand it in my head. I’m sure that there must be something that I’m not doing right if someone could just enlighten me that would be great!
Thanks to all of you for your time! Hope I can get this question answered…
Typically when you open your account, you determine the leverage that you want with your broker at that time (100:1, 50:1, 10:1…etc). I have not seen a broker where you can change your leverage with each trade, but maybe you can find one, though why you might want to do that, I have no idea.
In your example of a standard account with a balance of $10,000.00 and leverage of 10:1, in theory would not be possible as there would be no useable margin available and provided it is a USD nomiated pair(1 lot is 100,000 units… I.E. Usd/Can $100,000.00 but Gbp/Usd 152,000.00 which means the margin for U/C is 10k where as the margin for G/U is 15K.)
So in this example, the trader would get margin called just by the spread (in theory).
However if you read your broker agreement, most will let you go into your margin by a particular percent… anywhere from 25% to 75%+.
BP school explains margin as a hardline, once you cross it, your trade is called but in practise, your broker will let you lose most of your money by allowing your trade to use up some if not all of your required margin.
More confused now? In theory is shouldn’t be possible, but in practise it is…
Now I think I might be more confused but it doesn’t matter because I got answered my question a couple of days ago on Forex Strategies & Systems Revealed and I think I get the main point now.
As far as I am concerned the leverage used by your broker/account doesn’t matter. It’s how you make use of it. Leverage in and of itself does not increase your risk. It depends on how much capital you have.
For example, say you have $100,000 in your account with a 100:1 leverage. You trade a standard lot, $100,000 worth of currency. So the broker insists you put up $1000 to cover the trade. There is relatively little risk involved because in order to lose your capital ($100,000) the value of the currency you bought would have to essentially drop to zero. Unless you were buying Zimbabwe dollars, it’s not likely. It can happen, but not every day.
Now say you have $1,000 in your account, again with 100:1 leverage. Again trading a standard lot, you can barely make the $1,000 you need. But now every pip is $10, so a 100 pip move against you will wipe out your account. And 100 pip moves can and do happen, sometimes within minutes.
So the idea I am trying to get across to you is don’t worry about the leverage of your account - follow your OWN rules. If you only have $5,000 capital, you should not be trading anything other than micro ($1000) lots. Yes it’s harder to make money. But it’s harder to lose money too.
It’s not leverage that causes you to lose, it’s biting off a chunk that’s bigger than you can possibly swallow (like people with $10,000 controlling almost $1M), having the market move against you and forcing you into panic mode taking a devastating loss that wipes out half of your account or more.
Just because you CAN doesn’t mean you SHOULD. You are the boss.
Well we’re all glad you learned something today - but PLEASE! Listen to them. I remember when I first got started I thought - well, just this one time, I’ll try it - it never, ever, ever turns out well.
Been there, done that. I call it the “tuition fee”. He’s probably going to do it anyway because human nature drives us to test the limits. But now he has something to remember and to scold himself with, for when he’s older and wiser
I just want to make the point perfectly clear - leverage should make absolutely no difference in your trading, whether it’s 5:1 or 400:1. It’s the idiot that thinks he is going to make money every single time that gets in trouble. But this person only gets in trouble faster with leverage.
If you have $1000 in an account there is no way in the world you should be trading $10,000 lots, much less more. That’s not guts, that’s foolishness. “Ah but then I won’t make any money” - well yeah, it takes money to make money - duh. Perhaps there are people who have gotten extremely lucky and made millions with just $100 - show them to me? In fact it’s a myth. Most of the world’s billionaires did it on sound business practices, not “roulette”. I can show you lots of people who lost all their money in the markets though.
So draw yourself up a risk management plan that includes - what your biggest single loss can ever be allowed to be, what your maximum loss per trade can be, what you expect to make (less taxes/commissions) per month, and what % of your capital you are willing to invest. If you’re willing to lose a chunk of it, and take a chance, you can use leverage to trade more than your capital - eg trading $50,000 worth with $10k in the bank (5:1) if you can stomach the losses. But trading 100:1 with all of your money (ie, controlling $1M with $10k, or $100k with $1k) is absolute foolishness.
