Hello everyone,
I have been reading up on leveraging and margins and I would like to ask a question.
Assuming that you have an initial balance of $1000 and you[B] only trade in 0.01 [/B]volumes what is better to do from a potential margin-call point of view?
a) Open an account of say 1:10 leveraging or b) Open an account with 1:100 leveraging.
I was thinking b) is the better option and here is why (Please correct me if I am wrong). Again assuming that you only trade at 0.01 volumes in both cases you leverage the same, that is your true leverage is the same. However in case b) your free margin is 10 times as large as a). What (I think) this means is that in case b) there is less chance of a margin-call, or in other words the price has to move much further away for you to get called out.
Let’s look at an example scenario.
Assume that EUR/USD rate is 1.0774.
Now you open a long position and buy a 0.01 volume. In other words, you buy (0.01x100000=)1000 euros at 1.0774 dollars.
With case a) the 1:10 account the margin will be 1077.4 / 10 = 107.74, meaning your Free Margin and Margin Level will be 892.26 and 928.16% respectively.
With case b) the 1:100 account the margin will be 1077.4 / 100=10.74, meaning your Free Margin and Margin Level will be 989.26 and 9310.98% respectively.
Now since both a) and b) use the same volume it means that the potential loss (or gain) from any pip move is the same. The difference is the chance of a margin-call. That is, with b) the price has to move much further against you in order to get to 100% or less Free Margin.
So in case of a) it has to move 892.26
However, in case b) you stand to lose more money in case of a margin-call (989.26 or 98.3% of your balance vs 892.26 or 89.3% of your balance). This of course is another way of saying that in case b) the prices have to move further away to get a margin-call, hence the difference in loss.
Nevertheless, since in both a) and b) the purchase is fixed at 0.01 the movement in pips means you get the same profit/loss (i.e. true leveraging is the same).
So in conclusion I would imagine a bigger leverage on the same size balance and fixed volume trading should give you some more security and potential room for growth.
I suppose some people might say this gives you a false sense of safety since you might allow for bigger price movements before you are stopped out or be tempted to buy bigger volumes than 0.01
Which means that in both cases a good risk management and discipline is key.
Any thoughts on the above?