A simple Leverage vs Funds available newby question

Beginner Questions
1

A simple Leverage vs Funds available newby question.

After demo trading for 6 months, I now have a tested strategy that I am happy will provide consistency… my target is a cautious 5% gain per month.

As I am preparing to now go to a funded ‘Live’ Account, I have a question relating to Leverage and the funds that I have available.

On my Demo Ac, I have been using a £10,000 fund which my Broker allows me roughly to allocate £25 per pip (I mostly trade EUR/USD)… I will initially be funding my Live Account with £10,000 in real money… although I do have a fund of £50,000 available that I plan to use.

I have never fully understood leverage beyond it being a way for a broker to allow you to trade larger position sizes, I have been happy to date working without… my broker provides no leverage on my Demo AC hence just being able to trade max £25 per pip on a £10K account.

My thinking is that if I then do put in all of my £50K in to my live account, then in theory I should be able to then allocate £125 per pip…?

I read somewhere that this is a bad idea, and that you should not put all your funds in to an account, only a certain percentage… and use leverage instead… ?

So, my question (as a newby) relates to this… given that I have a £50K fund available to trade with (cautiously at the start obviously… I have a very good risk management discipline)… is there a formula for how much of that I should actually keep in my Account with a broker, and how much leverage I should be using to achieve the same amount of £/per pip?

Any advice or tips very welcome…

Thanks in advance.

2

Hello Paul,

This reply is not going to sound very friendly, so fasten your seat-belt.

With your faulty understanding of leverage, you absolutely SHOULD NOT consider trading with real money.

If you have accurately described the metrics of your trading, here’s where you stand:

  • You are trading a demo account “funded” with £10,000 in funny money. You incorrectly believe that your demo account provides no leverage, and that you are not using leverage in your demo trading.

  • However, your trades generate P/L at the rate of £25 per pip.

  • 2½ standard lots is the position size which corresponds to £25 per pip. In other words, your positions must have a notional value of £250,000 in order to generate P/L of £25 per pip.

  • Trading 2½ standard lots in a £10,000 account, you are using 25:1 actual leverage – because actual leverage used = notional value / account balance (i.e., £250,000 / £10,000 = 25).

  • You say that this is the maximum size your demo account allows you to trade. So obviously,
    your demo account is set to offer 25:1 maximum allowable leverage – and you are using every bit of it on every trade.

Now you are talking about opening a live account with £50,000 in real money, and using that account to trade positions generating £125 per pip. In other words, you are proposing to trade positions with real money that are 5 times as large as your demo positions.

With no prior experience trading real money in the forex market, you will be trading positions with notional values of £1.5 million.

This is recipe for disaster.

Your post proves that you have no understanding of leverage, and therefore no understanding of the risk which accompanies the use of leverage.

Your plan to begin live trading should be put ON HOLD, until you have mastered the concepts of
(1) maximum allowable leverage, (2) actual leverage used, and (3) sensible position-sizing.

3 Likes
3

Hi Clint… Many thanks for your detailed reply, I very much appreciate that you had taken the time to answer my question.

I have some additional questions if I may trouble you further, they may serve to further my display of naivety but potentially also challenge the normal concept of use of leverage in relation to my original question… so likewise… get ready to fasten your seat-belt.

Before replying I thought best to actually ask my broker what my Demo account leverage was set at and whether that would change when I moved to a live Account… their reply is below…

“Thanks for contacting us.
There is no set a minimum or maximum leverage on your account as each instrument is margined individually, for instance Wall street and other major indices are margined at 5% so the leverage for this will be 1:20, and major forex pairs are margined at a minimum of 3.33% which would be a leverage of 1:30.Your demo account is a retail account, which means that margins on the demo are as prescribed by ESMA and the FCA. Your Live account would also be subject to the same minimum margins, unless you are able to successfully apply for a professional account”… broker reply ends.

Previous to using this broker, and I think previous to the recent laws in place regarding allowed leverage levels on retails accounts, I had been using a different broker and when I opened a demo account with them it allowed me to select what leverage level I wanted… the default was 50:1 so I opened the account with that… this is when I was literally week one with Forex and purely at the stage of clicking buttons and randomly opening trades to get to know the platform, no strategy whatsoever etc… shooting from the hip wildly as all week one novices act.

This first demo account at 50:1 allowed me to place multiple really large size trades at the same time, ridiculous amounts that I won and lost with massively… but all part of the learning process… so I got used to these trade sizes in relation to thinking I was using 50:1 … I realized very quickly that these size trades were ridiculous and thought that I did not really need to use leverage as it could get an inexperienced trader in to deep trouble.

When I switched to the broker I am using now, the opening of the demo account did not provide an option to choose a leverage level, this must be because it was opened after the laws came in and the leverage level was set at as they say above.

I was surprised that I was only allowed to trade max £25 per pip on a £10,000 demo ac after having been allowed vastly greater levels than that previously… that is why I assumed my new account had no leverage… and it baffles me to hear that you say it must already be set at 25:1 whereas the previous account was supposedly set at 50:1 when the trade sizes and multiple positions allowed open seemed to be way more than 25:1 versus the 50:1 account. From your reply I have seen and understood how you have explained the 25:1 level.

As a day trader/scalper I have been using £25 per pip with a very tight 4 pip stop… giving me the widely accepted 1% of account risk level … so I am not sure as to why a 25:1 leverage level is considered risky when my plan uses a 1% risk…?

I have been trading mostly the EUR/USD, but have recently also started trading GBP/USD & USD/CAD which are all major pairs… I have noticed however that my account allows me different max trade sizes per trade for each of those 3 pairs… I am allowed to place greater trade sizes on the EUR/USD than the other 2 pairs which is confusing as my brokers reply doesn’t state that different pairs have different levels, and I’m also confused as to why with a fresh demo account of £10,000 then on the EUR/USD I am allowed £25 and not £30 per pip which their reply refers to?

Are you still with me Clint ?? again… thanks for the time.

I appreciate your words of caution, but the question of whether I should or shouldn’t as yet open a live account remains unclear. As mentioned in my original post, I openly stated that I was unaware of the full details of leverage use, this was because I assumed I was using none, and therefore did not really need to study that further as the trade size of £25 I was using alongside my strategy has (so far) seemed to head towards consistency and a profit target I am happy with, so I didn’t need to think further about leverage. As and when funds available increased or decreased above or below £10,000 then my position size would change accordingly and be adjusted up or down accordingly after each trade.

My final point that wasn’t covered in your reply, is that if it’s agreed that my strategy and risk management at 25:1 leverage on all trades seems to work OK, then I can’t see what the difference is if I choose to only have £10,000 of my £50,000 available in my live account and use 125:1 rather than deposit all £50,000 and just use 25:1… both will give me the same profit loss per trade surely, and that way I have added security of not having to deposit the full £50,000 with a broker.

This final point may not be valid however, as the terms of my broker to become a ‘professional’ trader (which means I can by pass the regulations for EU traders that restrict you to 30:1) I can not see being realistically met for a very long time and hence they would not until then allow my desired 125:1 level anyway… it seems that I would be allowed to trade £125 if I put all of my funds in with the broker, but not if I only chose to put £10,000 of my £50,000 in with a broker… seems a bit odd to me.

Pheeeeewww… I’m exhausted writing this… I sincerely hope you’ve stuck with me and further can help with my questions.

Thanks again…Paul

1 Like
4

Hello again, Paul

Yes, I made it all the way through your lengthy post. :grin: My reply will be a little shorter than your post.

• Regarding huge positions: Trading with huge leverage and very tight stops is a well established scalping technique. Extremely skilled scalpers can succeed with that technique, although for most newbies who try it, it proves to be fatal.

If you are one of the exceptional traders who can do, with raw talent, what it takes most traders years of learning to achieve – then my hat’s off to you, and I wish you stunning success. Time will tell, and I will look forward to progress reports from you, as you take this business by storm.

• Regarding your question about funding your live account with all, or just a portion, of your available trading capital – three points:

(1) You seemed to be saying that maximum allowable leverage is resricted by law where you are located. So, I’m surprised that you are suggesting, as one of your options, funding your live account with £10,000 and trading with 125:1 actual leverage. Would that even be possible? 125:1 leverage corresponds to 0.8% margin – which does not comport with the margin figures you quoted from your broker.

(2) Almost every trader I know has found that migrating from demo trading to live trading is not nearly as easy and straight-forward as anticipated. When real money is on the line, all sorts of psychological issues manifest themselves, even for traders who believe they have ice-water in their veins.

But again, maybe you are the exception to that rule. If so, maybe you will be able to avoid the typical experience of blowing out one’s first live account.

(3) If it were up to me, initially I would scale down, rather than up, when moving from demo to live. Rather than starting with £10,000 as an initial deposit, I would start out with £1,000. I would cut my position size down to mini-lots (£1 per pip), and I would keep it at that level, until I had completed at least 20 trades, maintaining the same win/loss ratio that I achieved previously in demo. Only then would I begin to scale up, gradually, in steps.

But, that’s just me.

I don’t consider myself one of those gifted traders, with raw talent, that I referred to above.

1 Like
5

Thanks again… shorter 2nd reply promised this time.

I researched more, and yes 30:1 is a restriction for EU traders so my 125:1 on a £10K ac question is not valid… not until a broker considers you to be at ‘pro’ level which the conditions are extremely tough to meet.
There is the potential option of registering with an Australian broker as they are not subject to the same financial restrictions, this may prove not to be a realistic option without further research.

I am confused as to why my broker physically allows (roughly) £25 per pip and not £30, and why the different pairs have differnet sizes… a question for the broker I understand.

Yes, I agree that opening a £1,000 starting account is a more realistic approach… but that would surely provide a £2.5 per pip size rather than £1 per pip as you suggested ?

Regards

Paul

6

£2.50 per pip would be the limit on a £1,000 account.

You don’t have to trade at the limit. You simply cannot trade above the limit.

The 30:1 leverage you have mentioned several times is the maximum allowable leverage on your account.

I am suggesting that you use 10:1 actual leverage in a £1,000 account. In other words, I am suggesting that the notional value of each of your scalps should be no more than 10 times the balance in your account. In a £1,000 account, that would be approximately 10,000 units of base currency
(i.e., 0.1 lot = 1 mini-lot), depending on the pair you are trading.

You began this conversation by saying that you don’t understand leverage. You need to educate yourself on the topic of leverage. Specifically, you need to be absolutely clear on the difference between maximum allowable leverage and actual leverage used.

And on the relationship between maximum allowable leverage and required initial margin.

And on the difference between required initial margin and maintenance margin.

Most traders recognize that their forex education is a never-ending, life-long undertaking. I urge you to be that serious about it, as well.

1 Like
7

Amen to that advice!!