I am worried I am missing a crucial element here, so fella’s if you could help me
If I have 2500$…with 400:1 Leverage… I have a Million units to work with right…? or am I missing something here. So, I am thinking this is very good, why mess with any broker who offers a smaller leverage…? Of course i know not to risk this all, but a very small % maybe 3%
So if I committ to a a personal max trade of 3% of my cash (2500$) thats 75$ on a trade…so does this mean then 75$ x 400…? = 3 mini lots (10k x3)…which is about 1$ x 3 = 3$ A Pip on a Euro/USD. So everything so far seems good if I got this right?, and pretend I trade and it hits my stop/loss… lets say 20 pips under current price…I lose just the 75$ I risked…or…God forbid, a heck of alot more…Help! Can you lose more then you traded with is what I guess I am asking…?
You should check out your broker’s margin requirements. You may risk getting margined called and that is not a good situation. Also, you are assuming your trade is going to win so you are not really risking 3%. Say you enter and then you get -20 pips right off the bat, well guess what, you are in the hole 3% and then some. I wouldn’t trade mini lots for a long time. I would recommend not trading mini lots until you have 10,000 in your account. Go micro baby, it will let you increase your lot size more often as compared to minis.
It depends on broker’s margin requirements. Lets say, you are at 100% margin level (margin level = account equity/margin), then you’ve used up all of your 3% ie, 75 $. If the margin level goes down to 50%, which is where most of the brokers issue a margin call that SwordOfTrue is talking about. At margin call, you either have to fund more or close your position at the prevailing market rate and thus incur more loss. You see the bigger picture. This is how I get it; newbie here, so someone else can explain better. But just my 2 cents.
Thanks guys for posting…Let me sharpin this question up. Can I lose anymore money then I lay on the table…ie i put up 75$ for currency pair x/y I bet north and she goes south…I am out the 75$ and nothing more…Or can it be more…?
I think you both sort of answered me…but being a slow weedeater guy it may take another run or 2 for me to comprehend. My worry is that they(the brokers) can continually tap into your account even after you have lost your initial investment/market order. I was initially told that you can’t lose a penny more then you wager in currency trading 400:1 leverage or not.
I do realize their are protective stop losses…and I need to see exactly how that works. I am months away from trading real money…as you can see :o
No. it will not be more. they will close your position and the danger with high leverage (such as 400:1) is the normal volatility of the currency pair forces your stop loss before you position had time to mature.
I look at it like this. Know first how much of your account you want to lose first.
If you have $1,000 and your risk for that trade is 3% of the $1,000. You have $30 to work with.
Now what type of account do you hold. Micro, Mini, Standard
Im going to use Micro for the example I follow. In Micro lot’s(1000 units), each pip is usually around $.10. Multiply the units by the current exchange rate and that is how much money you have to put up with no leverage.
I then find what my stop will be. Say I need to place a 100 pip s/l.
Take 100 pips and multiply that by $.10 a pip and that gives you losing $10 on your 100 pip stop loss with your 1 micro lot. So you can open 3 Micro lots, so if your 100 pip stop loss is hit you only lose $30 (3% of your 1,000).
The 3 micro lots make up your position. So in your position each pip equals $.30. You are holding 3,000 units. Say EUR/USD is at 1.34. Multiply 3,000 units by 1.34 and this gives you $4,020. You need that much to trade unless you are using leverage. Divide that number by 400 (400:1 leverage) and you are only using $10.05 of your money. Your usable margin is at $990(For more trades- this is where leverage can hurt you) . Equity is at $1,000 still. When your position starts to lose, you wont be margin called because the farthest your equity can go down is $30 to $970 because of your stop loss of 100 and this does not even comes close to your used margin. If it were to go lower thats when you are called.
So how I look at it is what you are willing to lose according to where you place your stop in relation to what size lots you are using. If you manage this then you will never fall in the trap of using/adding to positions with the extra usuable margin since you have such high leverage.
If I’m looking at it wrong, please someone correct me.
Thanks for all the advice fella’s. Breaking this down my style seems to mean that although 400:1 allows me to do more then the 200:1, the cushion for trades going sour is also excerbated much more so that it sort of negates itself.
I would like to see an example of two 5000$ Mini accounts performing the same exact Trade of lets say 100$ on the same exact currency pair with the exception being one account 200:1 and the other 400:1, all traded and synchronized in a precise moment of time. If I am understanding you folks the 400:1 of course buys more, then the 200:1, but the harsher margin requirements of 400:1 should your trade go sour, negates your cushion for moves against your position, even though you have the larger lot size. I dont know the exact number breakdowns, and I guess thats what I would love to see…but it seems its all about Cushion when the market is volitile and you are being whipsawed…am I wrong fellas, or am I slowley getting it! :o
I did some maths, someone can correct if am wrong.
Account 1:
Mini account
Balance: 5000
Risk = 3% (150 $)
Stop loss - 100 pips
Each pip in Mini = 1 $
100 pip = 100 $
150/100 = 1.5 Mini lots (not possible), either 1 (2% risk) lot or 2 lot (4 % risk)
1 lot = 10000 units = 10000 * 1.34 = 13400
without leverage, for 100 pip SL, at 2% risk, you need 13400 to trade with
Apply leverage,
400:1,
13400/400 = 33.5 $
33.5 - used margin
usable margin - 5000 - 33.5 = 4966.5 $
Everything looks good to me with PippingKids calculations I think an example that better illustrates what JustLeo is asking is the difference between Broker Leverage and True Leverage.
Using the previous example provided by ahefner a trader is using a micro account, risking 3%, and desires a 100 pip stop-loss for this position (EUR/USD).
100 pip stop-loss per lot = 100/.1 = $10
$30 / $10 = 3 lots
True leverage = Position Size / Account Size = 3000/1000 = 3:1
Used Margin (USD is counter currency) = (Exchange Rate * units) / leverage
Used Margin = (1.34*3000)/400 = $10.05
At this point, the 400:1 broker leverage is not really that important regarding MM b/c you are using s/l orders and you have plenty of available margin.
All these previous figures are conservative and suppose you feel good about a news release. And want to make more money on this trade. However, you want to stick to your money management principle of not risking more than 3% per position. Now, you are forced to lower the stop loss, let’s assume 50 pips.
50 pip stop-loss per lot = 50/.1 = $5
$30 / $5 = 6 lots
True leverage = Position Size / Account Size = 6000/1000 = 6:1
So, now you have less room for market volatility with only a 50 pip s/l or you are forced to risk more capital per trade. This is how leverage affects your trading account; for better or worse.
So, JustLeo’s point is validated…meaning, he will lose only $75/- using the aforementioned leverage(true leverage i.e), and we run into problem only when we want to make more money as you explained…
L Yeah, but I do not get to see Uncle Hugh all that often. Busy man and all.
Hello. I see what you are saying but isn’t the point the same that you are still only risking $30 of the account? Yes you are putting up more capital to open the trade but with the lower s/l now, you are still within your 3% of your account if you are stopped out.
) can validate my understanding?