2 quick questions

Beginner Questions
#1

Hey everyone long time lurker, first time poster :smiley: I have 2 questions that I haven’t been able to find the answers to and maybe somebody here can help me out.

  1. What are the theoretical limits of leverage? If a hedge fund or managed forex fund had $500,000,000 in assets to invest could they still use a 1:10 or higher leverage or would they be limited by the market?

  2. How do hedge funds/forex funds/high asset accounts trade? Do they trade through brokerages such as GFTForex or FXSol? Or do they have another route that they can take because they are trading such a high dollar amount?

#2

Not sure about the first question, but I’m guessing that big funds would only deal more directly through the interbank system rather than brokerages. I’m a noobie though, so take everything I say with a pinch of salt.

#3

Some brokers will limit the max lot size. When speaking about leverage I usually put it 10:1, ten dollars to every one dollar of net assets. Also, think of leverage as a margin %. I hate thinking about it in terms of how much you could control. Because if you used all available leverage then you couldn’t withstand any movement what so ever. So to give an example, my leverage is set to 50:1, meaning I need to have 2% of the position in net assets. So if I want to trade a standard lot (100,000) I would need 2% of that 100k (2k) to take on the position. Also, my net asset would have to be above half of the margin used. So my net assets would have to be 1k+ before a margin call. So lets say I opened that position with just 2,000 then I only have room of 1,000 before a margin call. And at 10 dollars a pip that is only 100 pips. If I got a margin call I would only be left with 1,000. So I urge you to think of leverage in percentages of how much you would need to take on a position instead of thinking about in the way of how much you can trade.

The maximum leverage I use is 5:1, I found this to be my comfort zone of decent returns a risk tolerance.

So to put it simply I say screw leverage, think about margin requirements!

#4

This doesn’t answer directly your first answer, but it refers to it.
what I’ve learnt here in this forum, considering brokers is as follows:

most of the time, you get into a position against the broker, not the market. meaning - they don’t really take your money and multiply it by 100, (if you’re 1:100 leverage), and get in the market with that sum.
they only take a position against you and when the currency moves they pay you or charge you accordingly, as if they really did multiply your sum.
they also tend to match\pair positions, meaning, if someone goes long on a pair with (leveraged) 500k, and five other guys go short each 100k, they don’t need to put a dollar in the market. it’s the 500k dude against the 5 100k’s.

theoraticly, I suppose that if you really had 500M, the broker needs to find people with the same amount going the opposite way. they obviously don’t have 50,000M to leverage you.

if anyone finds this not fully accurate, feel free to correct me.

hope this helps.

Regards.

#5

Hedge funds and the like will have their leverage limited only by the amount of credit the counterparties with whom they trade are willing to allow them.

  1. How do hedge funds/forex funds/high asset accounts trade? Do they trade through brokerages such as GFTForex or FXSol? Or do they have another route that they can take because they are trading such a high dollar amount?

As noted previously, the funds, etc. trade with and amongst each other, the banks, and that whole group making up the inter-bank market. They essentially trade directly with each other.