Hello all,
Quick question on leverage,
It seems to me that baby-pips school (plus quite a lot of other forex educational material) makes very clear the dangers and pitfalls of being overleverages - which i understand should be communicated to every newcoming trader.
However, I have come to my own conclusion that leverage doesn’t really matter if you use strict risk management around position sizing.
For example,
If i wanted to risk 2% of my account on a trade on the EUR/GBP, then perfoming the calculation (converting to base currency, working out pip values etc…) should prohibit any negative effects of being overleveraged, as you have meticulously planned your trades using a combination of SLs, TPs and volume to ensure no larger loss than 2%.
The only caveat I can see is that you have enough Margin% to open the trade, and that the brokers position sizing requirements matches up to your proposed trades.
Please someone correct me if I am wrong?
So what your saying is that if you have a SL of 10 pips for example, you can afford to leverage your account more than if you had a SL of 100 pips - as long as your money management rules on the high leverage trade still equaled a 2% loss?
If so then yes, leverage dangers mean very little (at least to me). I have very strict money management ruling and my account is leveraged at different ratios for different trades all the time depending on where my stops etc are.
2% of my account is 2% of my account, if my stop is 100 pips away I will be leveraging my account far less than if my stop is 10 pips away but both trades will have the exact same risk.
Kenjii
You’re correct - if you set your trade to be a max risk of 2% and just open that one trade then leverage will not be what kills your account. It’s when you end up betting $5 per pip and you’ve got $1,000 in your account that you’re probably going to regret things sooner or later.
What I’m really saying (and opening to challenge) is that under the conditions detailed above, a trader may as well just open a 400:1 leveraged account, as it will make no difference to the risk or danger.
Sure they can if they stick to sound money management rules. Though, in my opinion, you’re better off removing the temptations of being able to use ridiculously high leverage as it’ll only take one moment’s weakness to make you really regret it. 20-1 is more than enough for me personally.
I have my answer - Thanks for the replies guys - most appreciated.
LOL, I don’t think so.
What, brokers mean by 1:400 is simply “Maximum Allowed Leverage” not 1:400 Leveraged account as you said in your previous post.
The leverage can be totally controlled by Lot Size in relation to account balance.
For example, if you have one of those 1:400 Accounts with 100,000$ in it, and you decuide to buy 300,000$ worth of currency you are not leveraging 1:400, you are leveraging 1:3.
1:400 in this case is just another way to defining Margin Requirements, which is different from leverage. In this case 1:400 translates to 0.25% Margin Requirement.
Not really sure what gave you that impression - but yes, I’m of that understanding.
I would also agree that if you follow solid risk management rules, leverage really shouldn’t have any affect on your trading or your account.
if you risk only 2% then the more leverage you use the tighter your stops would need to be. But just because you have 400:1 available doesn’t mean you have to use it
Yeah that’s what I mean. It’s a matter of semantics.
People say leverage, but they don’t want to say leverage at all, they mean Margin Requirements, leverage is another thing.