Hello Eveerybody,
I am just making sure that I understand leverage correctly. The reason I am questioning it is because of different points of view that I have heard on it. Recently I have gotten really into the Rich Dad, Poor Dad book series by Robert Kiyosaki. Although he is not a currency trader, his point of view is that leverage is a good thing. Throughout the past few months of studying forex I have heard many times, that it is a huge mistake to over leverage your account. But how much leverage is too much? Robert Kiyosaki also mentions that leverage is a double edged sword, and maybe it is the same way in forex, and when you cut yourself with too sharp of a double edged sword, recovery is made impossible.
Anyway, my current understanding of leverage in forex goes like this:
ex. Leverage 1 to 10
Position size $100
-You are trading $1000, but only need $100 capital, the broker supplies the other $900
Win 5%, Net $50, compared only $5 if no leverage was used
Lose 3%, Lose $30, compared to $3 if no leverage was used
For awhile i thought that Leverage of 1:10, would be one part you, ten parts broker
ex. $100 (mine) + $1000 (brokers) = $1100 total amount traded
So how much is too much, obviously 1:50 is too much because you are essentially risking 50 times the amount of capital you are putting up, which would mean you could go broke in just two trades if you are risking 1%
Any and all advice, thoughts and comments are appreciated. Thanks.
A lot of it will have to do with where you set your stops. I personally don’t trade with over 10:1 but mostly 5:1. So lets say you have $1000.00 in a mini account and you want to swing trade with a 50 pip stop. Well at 10:1 your risking $50.00 per trade which is 5%…to me that is too much. So you have a choice, you could trade 5 micro lots (5K) and thus lower your risk to 2.5% which is acceptable, or deposit another $1000 if you want trade mini lots. You’ll be trading 5:1 leverage
If you day trade or scalp where your stops are smaller, say 20-30 pips, you can get away with 10:1. I don’t need to tell you leverage can work in your favor or against you. If your just starting out, I personally would recommend trading a micro account using 1 micro lot per $200.00 in deposited funds.
I started trading Forex 10 years ago when you could get 200:1 leverage here in the US…and I used all of it! I blew out my account a few times before I realized that too much leverage was a bad thing…hehehe.
It takes a while to get good at trading the Forex, or at least it took me a while. I’m sure there are some that are just naturally good at it. But I get a rush from taking risk…enough said…lol! 10 years later I am no longer the gun slinger that would be up 300% in a week, then kiss it all good-bye in 48 hours! Hope that helped.
Yea, that helps a ton, thanks. Now that is cleared up, does anyone have any broker recommendations that are ECN, use MT4i and based in the U.S.? I currently use pepperstone for my demo account, but they don’t allow anybody in the U.S. to open live accounts because of the FTCC’s rules.
hi,
may be i m wrong but i dont think that leverage have any affect on your trading if you are risking 2 percent of your capital i mean the money you have deposited. e.g. you have deposited 1000 usd with 1:500 leverage and according to 2 % of your deposited amount your trade would be max 5 micro lots that is 5000 of base currency that will be around 15 usd with stop loss of 20 pips that would be around 10 usd. this is my own point of view of leverage. please disagree with me by explaining how my point is wrong, for my education. thanks a lot for disagreeing with me.
I would agree with amarbutt, if you are trading correctly, basing your total open positions by your balance, it would just change the margin taken from your account to keep that position.