Leverage question!

Hello
I’m newbie in forex, so maybe you can explain to me few basic things.

If I invest 1k$ with a leverage of 1:100 , and I blow my account off. Will I owe anything to the company and how much ? :eek:

Hey,

Leverage doesnt have much to do with how much you owe a company, its just the multiple used when trying to understand margin requirment.

As long as you use a stop loss on each trade, and calculate this so so that your accuont does not go into negative, you will never owe anything to anyone. Your just be annoyed that you’ve lost you money :slight_smile:

Leverage tells you how much margin you require, at least in a sence.

Stop loss and more stop losses will keep you in control!! Dont trade without them, or you will risk owing money to the provider.

Kind Regards,

James

I may be wrong in the way I say this, but i think a 100:1 leverage means you need 100 times the amount your are trading per point, or Lot to open the trade.

so a 100:1 leverage, when trading £1.00 per point means you need a MARGIN of £100 to place the trade. Hence the trdae can move 100 points less the spread against you. In your case if you have £1000 invested you can risk 1000 points less the spread in points.

Place your stop loss within this 1000 point range, and you will not owe anyone anything!!

By the way, dont give yourself a 1000 point Stop Loss, becasue that would be crazy, lol.

Kind Regards

James

thx James for your comments.
I still in doubt , so Let me explain my situation more …

so here i’m with 1k$ i want to open a small order (0.1 volume lot size) with leverage 1:1 i need margin of 15,531.30 USD to place an order. i do not have that much money therefore i make a leverage of 1:100 … so now i need margin 155.42 USD to place an order … this i can afford. so i go with leverage of 1:100 and start to trade…

here we have 2 scenarios :slight_smile: bad and good
good scenario is that i earn some bucks and increase net balance of my account
bad scenario is that i blew off my account.

this is where the things get tough, because basically i borrowed 100k$ from the company to place an order and it seems like i blew them off.
i cannot understand this stuff with leverage, because i think that when we borrow we have to give back … but here it looks like i borrowed i spend 99k$ of somebody’s money and i do not have to give them back ? isn’t it sounds stupid ?

and vice versa if i earn 100 bucks with leverage of 100:1 i have to give 100% back … so basically i earned only 1 bucks.
I kind of mess everything about leverage in my hade and now I do not understand it.
Too much leverage is bad, but if It decreased my margin and I’m on the positive side, so why is it bad?

I appreciate all the answers that you will post, thank you for helping me with understanding of my problem. :slight_smile:

If you have $1,000 you’ll want to risk about 1-2% of your account in a trade. So that means you’ll risk a max of $20.

For example you go long with EUR/USD at say 1.3300 and you enter with 5 micro lots (10c / pip per lot or 50c per pip in total) with a protective stop at 1.3280. If price drops and hits your stop you’ll lose 20 pips and the cost to your account would be 20 pips x 10c x 5 = $10 or 1% of your account. As you’ve made sure that the risk to your account is small you don’t need to worry about leverage / margin or losing more money than your account can afford.

Your not physically borrowing when spread betting though, its just a way to trade with little equity.

All you need to concentrate on is not blowing your account in one go. most people suggest, like the above, 2% per trade. That way you can loose loads of times and still have time to get back in the game.

2% of you 1K is $20. So never use more than $20 per trade. you can spread this $20 over as few or as many points as you like.

Say you want a stop loss of 25 points, then that going to be ($20 / 25) = $0.8 per point.

The 100:1 Leverage is standard, so do not worry, we all use it when trading retail amounts etc. very few people lower the leverage to suit their own needs.

Just look up on stop loss, in the above example your stop loss is at 25point. 25 points is what you wanted to risk, so that where your stop goes. That way you cant loose any more than 25points worth, hence your $20.

You now have $980 left to play with…

Easy and slow with your bank balance though, these small amounts soon add up. say you win the above $20 trade, you now have $1020, so use 2% of that, and so on. When you get better you may feel upto 5% of your bank balance is ok. Thats when things get a little sketchy if you hit a bad streek though.

Please dont worry about leverage, just becasue you seem to be borrowing thousands to place your micro lot trade, your not actaully doing this in real terms.

But always use a STOP LOSS, by not using these, and with your 100:1 leverage you will soon blow it all.

Does this make any more sence?

thank you guys for help :slight_smile:

The leverage you borrowed would never be in jeopardy.

When you trade on leverage, in the example you mentioned, your “used margin” of $155.42 is subtracted from your $1,000.00 deposit. The 15k leverage borrowed from the broker is not part of the equation for anything other than to hold your position.

You then have a “usable margin” of $844.58 left in the account that is then subject to gain or lose depending upon how your trade performs.

You quoted a mini lot price, so what would happen is that for every pip gained or lost, you would have gained or lost a dollar.

So therefore, you would have 844 pips for price to move against you in order to receive a “margin call”. At which point your account is closed by the broker, leaving you somewhere in the vicinity of $155 in your account. Depending of course where the order could be liquidated.

The only way you would owe money is if you were holding a trade over the weekend, and it was close to margin call prior to close on Friday. Then, out of the blue North Korea attacks South Korea on a Saturday while your broker is closed, and the euro, or pound or yen drops like a stone.

When the broker opens on Sunday, it could have possibly not only wiped out your “usable margin”, but also your “used margin”.

The order is closed, and you would owe the difference.

Say it dropped 200 pips below your margin call point. The math would be:

$844.00 gone due to bad trade, then margin call.

Your "used margin would then be tapped

$155.00 “used margin”
-$200.00 in continued decrease in trade value


-$45.00

Your account is wiped out, including your 'used margin", and the amount you would owe would be 45 dollars.

The 15k you borrowed goes back to the broker untouched.

Make sense?

thx Master :smiley:

Please don’t say you borrow from your broker. You don’t. It never happens. Not even a little bit.

The margin you put up is surety against the value of your position declining to protect the broker (and the system at large) against your losses, especially since those losses are gains in someone else’s account. You never buy or sell any currency - just agree to do so in the future, a future that never actually comes - so there is no need for you to borrow anything.

True dat.

Was just trying to put it in the simplest of terms.
But bottom line is, we both say the broker’s position is never really part of the equation in terms of loss or gain.

Nor would it need to be repaid by the trader, which I think was the initial worry.

Thanks for the clarification.

If you lose more than the value of your account, whether you owe or not depends on your broker’s policies. Some guarantee you never to go negative. Others don’t. You have to be sure to check.

Even better - never put yourself in a position to find out. :wink:

Key point:)

Funny thing about this trading is the fact that I didn’t consistently star making profit, until I took the broker out of the equasion.

And I’m not talking about the spread;)