Hi Everybody! I need to know how to calculate a trade based on leverage. For instance i have 500 dollars on my account, i want to put all of that on a 1:50 leverage in one trade but mt4 doesnt show me how much to put in to reach 100% exposure. Anyone here for some mathematical help?
Thank you in advance!
Depending on your broker, and on the pair you intend to trade, you might not be able to enter such a trade.
Example: Let’s say you have $500 in your account which you want to leverage [B]x50,[/B] in order to trade the largest possible USD/JPY position. $500 x 50 = $25,000. So, you are attempting to put on a position in USD/JPY with a notional value of $25,000. Clearly, that means 25 micro-lots of USD/JPY (each micro-lot being 1,000 units of USD).
Let’s say that your broker is FXCM-US. Each micro-lot of USD/JPY requires [B]margin[/B] of $30.* Twenty-five micro-lots x $30 per micro-lot = $750 margin required, just to open a position of this size. You don’t have $750 in your account, so forget about 25 micro-lots of USD/JPY. Maybe there’s a pair with a lower required margin that you could trade instead.
Staying with FXCM in this example, you could scan their table of margin requirements, looking for a pair requiring only 2% margin, and you would identify USD/CAD as such a pair. Okay, so it looks like you could leverage your $500 account x50 in a USD/CAD trade, without falling short of the total required margin to open the trade.
Specifically, a $25,000 position in USD/CAD requires total initial margin of $500 (25 micro-lots x $20 per micro-lot). You have $500 in your account, so you’re good to go, right? Sorry, no. If you succeeded in entering this trade, you would immediately be in [B]margin-call[/B] trouble.
For the moment, let’s ignore the cost of the spread, and let’s ignore the loss which would occur if price moves against your position. At the instant that you open your trade (25 micro-lots of USD/CAD), your Balance = $500, your Equity = $500, your Used Margin = $500, and your Usable Margin = 0. FXCM’s margin policy states that if Usable Margin falls to zero, you will get a [B]Margin Warning,[/B] which means [I]fix it[/I] (so that your Usable Margin is more than zero), or face having your position forcibly liquidated. So, right from the get-go, your position is untenable.
Now, factor in the spread cost, and the probability that price will fluctuate above AND below your entry price before moving significantly in your favor — and your Equity is now less than $500, your Usable Margin is less than zero, and you have even more ground to make up. So, what to do?
Well, obviously, you can’t do 25 micro-lots; which means that you can’t actually go [I]all in[/I] using 50:1 leverage. So, how about 24 micro-lots? Let’s run the numbers.
You open a 24 micro-lot position in USD/CAD. Required margin = 24 x $20 = $480. The spread = 0.7 pips per micro-lot x 24 micro-lots x $0.08 per pip = $1.34 (approximately). At the moment when you open this position, your Balance = $500, your Equity = $498.66, your Used Margin = $480, and your Usable Margin = $18.66. At this point, you should be able to follow the math, and you should be able to figure out where that $18.66 figure came from.
If a price fluctuation happens to create a loss of $18.66 or more in your position, you will be right back in the Margin Warning situation. How much of a price move (in pips) would it take to generate a loss of $18.66? Given the current USD/CAD pip-value of $0.08 per pip per micro-lot, every 1-pip change in the price of USD/CAD generates a profit or loss of $1.92 in your position ($0.08 per pip per micro-lot x 24 micro-lots). And a 9.8-pip move against your position would eat up your $18.66 in Usable Margin. Result: a Margin Warning.
A Margin Warning gives you 3 days (nominally) to fix things, or face liquidation. If price recovers, and starts to go your way, you could escape the Margin Warning, without having to take any action.
If price does not recover, and your position remains in negative territory, you will have to close a portion of your position (say, take off one micro-lot), in order to get your Usable Margin back above zero. In this scenario, [I]another[/I] decline in price of 10 pips (or so) would put you right back in Margin Warning trouble.
All of the above is based on FXCM’s numbers and policies. If you are using a different broker, then the numbers and policies that apply to your trading may be different. Study your broker’s website, and his Terms and Conditions document, or talk to him directly, to get correct information on margin requirements, margin-call procedures, spread costs, etc.
Generally, the trading method you are asking about — going [I]all in,[/I] with maximum leverage — is not a smart way to trade. If you’re a skilled scalper, you might be able to use leverage [I]approaching[/I] the maximum allowable 50:1, but this requires being very quick on the trigger, getting out of losing positions with no more than a couple of pips of loss per trade.
For any other style of trading, where each trade needs 20 pips or 30 pips or more of breathing room to accommodate price fluctuations against your position, the trading method you are asking about is essentially a recipe for blowing up your account.
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Very nice post clint!!
I wonder if you should go through all that math on every single trade you make?
Say you want to risk 3% of your capital every trade… you would need to check how many pips the stop loss should be at…
3% of $500 is $15.
and lets say you lose $0.08 per pip per micro lot.
So you can buy about 187 micro lots?
I guess you don’t need to worry much about margin when you risk only 3% of your capital unless you have a lot of trades going on at once… but probably easier to just make a rule to never risk more than a total of perhaps 20% of your capital across all active trades.
Thanks.
No, of course not.
The OP was asking about [I][B]actually using[/B][/I] maximum allowable leverage. In effect, he was asking about “pushing the envelope” to the limit in sizing his positions.
Instead of simply telling him, [I]‘It’s a bad idea, don’t do it’,[/I] I wanted to illustrate the issues raised by such a trading method.
3% risk per trade might be suitable for some traders, but it’s too rich (IMO) for newbies. I’d say stick to 2%, or less.
20% overall portfolio risk will get you into big trouble, unless you are swing trading, or position trading, with large stop-losses.
Run some numbers for yourself, and calculate the margin that would be required, if you risked 3% on [I]each[/I] of 6 trades (for an overall portfolio risk of 18%), and each trade carried a 40-pip stop-loss.
Then repeat the calculation for 30-pip stop-losses, and 100-pip stop-losses.
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Clint, I wondered if you could explain something to me? I’ve been demo trading for a couple of months now and have developed a consistently profitable system. I’m going to continue demo trading for a good while longer, however, demo trading doesn’t teach you much about leverage. I have completed the school but don’t fully understand the explanation re leverage.
In terms of losses, if you place 1% of your £500 account on a trade with leverage of 500:1 -so £2500 with a take profit of 30 pips, what happens if the trade moves against you by 30 pips and hits your stop loss? - Do you loose £2500 and your account closes or do you just lose £5?
What ever you risk is what ever you lose, regardless of the leverage used. The maximum leverage available just allows you to ‘bet’ more per pip of movement should you want to. You would still risk the same 1%, but your stop would have to be tighter due to the inflated risk per pip.
Thank-you! Whereabouts in Cheshire are you? I’m also from Cheshire…
Let’s deconstruct your example in order to illustrate leverage.
You have £500 in your account. Your broker allows you to use leverage up to 500:1 — which, of course, you would never do. * (See the footnote at the bottom of this post.)
You enter a trade in which you are risking 1% of your balance on an adverse move of 30 pips. In other words, your 30-pip stop-loss, if hit, would result in a loss of 1% of your balance (i.e., £5).
How much leverage are you actually using?
To answer that, we need to know the pair you are trading, and we need to calculate your position size in units of base currency, or in lots, or in fractions of a lot.
Let’s assume you are trading the EUR/GBP.
There are two ways to calculate position size: the hard way (by hand), and the easy way (using a Position Size Calculator).
Being lazy, we decide to use the Calculator. Babypips has a good one —
Position Size Calculator: Free Online Forex Position Sizing Calculator
If you plug in the relevant numbers, the Calculator tells you that you can trade 1,667 units of EUR (the base currency), to accomplish your purpose, which is 1% risk on a 30-pip stop-loss.
If your broker is not set up to handle trades in unit-amounts, then you will have to drop down to a position size of 1 micro-lot, which is 1,000 units of EUR. Note that this will cut your risk from 1% to 0.6% on a 30-pip loss.
If your position size is 1,667 units of EUR, worth £0.8688 per euro (at current prices), then your position size is 1,667 x £0.8688 = £1,448.29
That is, you are trading a £1,448 position with an account that has only £500 in it. In other words, you are leveraged. By how much? By 1,448 / 500 = 2.9 (in round numbers).
You are actually using leverage = 2.9:1
Notice that your broker’s maximum allowable leverage of 500:1 does not enter into this calculation. Also, your take-profit point is irrelevant to this calculation. And finally, the £2,500 figure in your post doesn’t relate to anything. Where did that come from?
I hope this has helped to establish in your mind the concepts of (1) maximum allowable leverage, and (2) actual leverage used.
Write back, if you have additional questions.
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Hi Gambler!
Here is the formal for you: 50*500=25000=0.25 lot.
Margin call at most brokers is 30-50%