So correct me if im wrong in my understanding of leverage. Leverage is when a broker lends you money to buy/sell a lot or a currency. So if you are trying to buy a standard lot (100,000), and your account is 100:1, the broker will take 1000 dollars from your account as holdings for your trade, then depending on if you win or lose the trade you will be given back that 1000$ +/- earning/losses respectfully. So then my question is why wouldn’t everyone use a very large leverage? Or is the reason because if you would lose 1000$ or more the broker could just close your trade to prevent their losses.
Hey SkeletonKey, I think most people do use large leverages in Forex. They do so because of the relatively small price movements in Forex. They don’t always use the maximum level of leverage because they want to control their Risk, more leverage leads to more risk. And yes you can lose more than you have, and they will close your trades, this Is a Margin call.
It’s a delicate blend bro.
Say you’re lucky enough to be able to have a $100 000 trading pool. Do you really want to deposit that with your Broker. Probably not the best idea. So you deposit $1000 and use 100:1 leverage to trade with. But you’re willing to risk 1% per trade. Depending on your broker, you are then going to suffer a margin call when your trade goes wrong but before it actually reaches it stop. That’s bad.
Leverage is over marketed, over discussed and over-rated. Generally promoted through bucket shops who make their money when you lose yours. You don’t need it to trade. I only every use 20:1 but how I trade is completely nuts and nobody should every need more. You don’t need it to fund your account. As demonstrated in the above example, your original post and correctly identified by Chartzard you’ll end up getting margin calls.
Of course, there is always exceptions, but if you do happen to have a spare couple of million to trade with your local bank manager will be going “please sir can I have some more.”
This is actually incorrect. In retail forex, unlike stocks, when you use leverage you don’t actually borrow anything. Your margin deposit is just a surety against loss, as you basically described.
I hadn’t quite thought this through, until reading your reply.
It seems to me that it depends, a little, what you mean by “borrow”?
If you’re trading with/against/via a [I]counterparty market-maker[/I] (as most members here surely are), then what you say above is undeniably true.
If, on the other hand, you’re not, but trading with leverage through a [I]genuine[/I] broker, I think you could perfectly reasonably argue that - at least in one sense - you’re “borrowing” from the broker for the duration of the trade (and indeed that for that reason the duration of the trade is effectively limited by the lasting-out of your security deposited)?
Leverage is one kind of loan from broker,it doesn;t increase our balance or equity,we can open only big position by our small capital,I think low leverage is more better for our trading.When we using high leverage we will multiply our account but if the price goes against you the risk of losing all money will be greater.
So, your happy to leave $100 000 in your account with your broker when your margin requirements might be say $5000. That’s a big risk bro. What happens if your broker goes belly-up?
Bet there goes that 35% profit you just made as well.
As I said bro, it’s a blend, but at the end of the day. you need leverage, not much but. Certainly not at the levels being marketed by brokers.
Thank you everyone, i think im all cleared up now with my understanding about leverage and its associated risks. So large leverage is considered a bad thing normally because margin calls can happen if you risk more than 5% of your holdings or what ever the percentage is for your particular broker. So then the correct way to use leverage is to decide how much your willing to risk, lets say for example 50$ per trade which is 1% of a 5000$ account and then use leverage which would help you facilitate those trades using a standard/mini/micro lot. So if we were to trade with standard lots that would mean i would want to have a 20:1 leverage. Im i in the right still?
High leverage is a double-edged sword. While it can results in high profits, it can also results in high losses.
Hi SkeletonKey,
please read this BabyPips thread:
http://forums.babypips.com/newbie-island/73165-leverage.html
Yes, but also will depending with lot size that used, use smallest lot size in high leverage also will getting smallest profit compared use bigger lot size, but many expert suggested for newbie using low leverage to prevent from greedy
If we are going to be using Higher trading leverages then we will stand to loose more than we can gain and this will also put a pressure on the trading margins that we have in our accounts.
Well said John.Leverage is good to use as low as possible to avoid risk.
No it’s not. It’s about as useful as saying ice can be melted and reused as water.
As for your statement, it shows a clear lack of understanding how leverage can be used to your advantage and also risk aversion.
Higher the leverage the more difficult is to avoid a margin call.Correct me if I am wrong.
And if you read your broker’s PDS they will tell you that your risk is to them and them alone as your counterparty and issuer of the CFD. Your risk is they aren’t able to pay. So as I said here
And bigger the losses if there’s an unpredictable market event which is known to happen from time to time (like SNB floor removal, or Tsunami in Japan).
About Leverage
The use of leverage from Forex traders aims to increase significantly the returns from Forex trading. It is used from the traders to profit from the rate changes between the two currency pairs. In general lines, leverage is a loan provided to a Forex trader from a Broker. Due to the small fluctuations between the currency pairs without the use of leverage, the Forex traders will not be able to trade large volume of currency pairs. As such, the returns will be far lower and thus will not offer any benefit for individuals to be involved in the Forex market.
It is usually expressed as a ratio. For example, if your Forex Broker requires a minimum of 1% (ratio 100:1 means 1/100= 0.01 or 1%) margin then you must have at least 1% of the total volume available as cash in your trading account. As a trader you need to understand very well the pros and corns related to leverage and margin requirement. It can easily lead to trade larger volumes that can either boost your gains but they can also lead to huge losses if the trade goes against you. Always have in mind ‘‘The increased leverage increases financial risk’’
As leverage increase your buying power it also increase the speed of losses. Basically with very high leverage you can lose 1000$ with a blink of eye, from even a slight move of an exchange rate.
Almost all retail traders use leverage. It is not possible for them to trade without using leverage as they don’t have huge account balances to trade.