I am sure I understand leverage but want to make sure I have not missed something really obvious.
I resume trading next week but have email from my broker to say leverage changes are coming and my broker is changing from 1:500 to 1:30, I can opt to keep it higher by changing the product or leave as is and have 1:30.
But if you are rock solid in money management and only ever risk 2% of your account balance then surely higher leverage is more desirable.
Higher leverage gives better rate of return on each trade (and yes possible greater loss) but thatâs fixed i.e my losses per trade are limited to risk per trade of 2% irrespective of leverage.
I would assume the leverage changes are to protect new traders blasting accounts in a few ill fated trades but maybe I miss something else in this.?
My Q. Assuming my money management is solid, max 2% risk of my account balance risked per trade, my strategy is better than 1:1 then what is the negative impact of keeping higher leverage?.
I think the answer is none but I want to be sure there isnât something else in all of this I missed. Thank you,
The only impact of higher leverage is that a smaller amount of your equity is reserved as a deposit in the form of initial margin against your positions. This allows either more positions to be opened or gives more room for your account to absorb additional margin if your open positions are running at a loss.
In your case, I doubt that 1:30 liquidity will be a problem since you keep within moderate risk parameters.
However, a much bigger question here is why your leverage is being changed to 1:30 from 1:500. This sounds like your broker is adjusting to regulatory requirements in their country which place a maximum of 1:30 leverage on retail accounts. If they are offering you the option to maintain the higher leverage of 1:500 then it sounds like they are offering to move your account to their offshore subsidiary, which has a much more dubious regulatory set up, e.g. registered in the Grenadines and St Vincent islands.
Whilst this may not be a problem, you should at least know what regulation applies to your account if your retain the 1:500 level of liquidity.
I hope you will let us know as this is an issue of interest generally.
Hello,
Yes they are regulatory changes so it will go down from 1:500 to 1:30 if I do nothing.
You have hit the nail on the head regarding offshore. I am wrestling with :
bigger margin=more profitable trades
vs
risk of it being offshore which I am uncertain of.
I am not sure what you mean here. Leverage does not itself affect the return on each trade. That is only a combination of position size x number of pips.
Higher leverage only enables you to take bigger positions with the same amount of equity. This is generally considered a highârisk activity!
Regarding off-shore brokers, this is not necessarily a problem. But it can be, depending on the company and its intentions!!
I have noticed that a number of larger broker firms have subsidiaries in well- regulated areas like ASIC, ESMA, FCA, as well as off-shore entities for so-called âinternationalâ clients. In these cases, the off-shore arm is likely to be acceptable. However, in addition to the high leverage, I donât think these off-shore brokers offer the negative equity protection available from the main regulated brokers. Things to think about!
Personally, I would think it worthwhile continuing initially with your existing set-up and see how you cope with the lower leverage. If it proves to be too restrictive then it might be worth considering a move to an off-shore office.
Thank you. Appreciated. Since I posted I have read a lot around leverage and I did not fully understand it.
I work on % risk of my account per trade with a fixed SL (risk), not the amount I âcouldâ leverage into a trade so never paid it much attention.
> Personally, I would think it worthwhile continuing initially with your existing set-up and see how you cope with the lower leverage. If it proves to be too restrictive then it might be worth considering a move to an off-shore office.
