Sorry if this is a stupid question, but I couldn’t find a clear answer anywhere.
Let’s say that with my risk management (let’s say 2% risk of my entire account) I end up with a position size equivalent to 2000$, but my account size is only 1000$.
In this case I could for instance use a 2X leverage to be able to buy a position worth 2000$.
Now here’s the part I don’t understand: I set up my stop loss and calculate my position size to only risk 2% of my account, so in this case 20$.
Now if my stop loss kicks in before the liquidation price, because of my 2x leverage, will I lose 20$? Or 2 x 20$ = 40$ ?
My intuition would tell me that it’s the later (hope I’m wrong!) But in this case I’m a bit confused about my « risk management » as I only wanted to risk 2% but in the end I end up losing 4%….
The reason I think I will end up losing 2x 2% is because of leverage, a price moving 50% in the wrong direction will liquidate my position, so to me, at the time price hits my stop loss, the same leverage is applied. But maybe I did not fully understand it.
In case I’m right, then what’s the point going through all this stop loss and position size calculation if in the end, because of leverage, my risk isn’t properly managed?
And my last question would be, is it possible to stick to my 2% risk, independently of leverage and without modifying my stop loss position?
Yes I know, I used the true leverage in my post just as an exemple.
The thing I really want to know is if my stop loss is triggered, do I lose 2% of 1000$, or leverage times 2% of 1000$ ?
Leverage and risk exposure are totally different things.
The only effect of leverage is to determine how much of your account balance will be reserved against your open positions. The higher the leverage, the smaller the deposit. Therefore for the same amount of account capital you can open bigger positions with higher leverage.
But your risk exposure is purely calculated from the pip value of your position size x the number of pips to your stoploss. Your leverage has nothing to do with this aspect at all.
So if you open a microlot with a nominal value of USD1000 and a pip value of 10c then your stoploss can be up to 200 pips before you lose $20. If you open 2 microlots then your overall pip value is now 20c and your stoploss will be a maximum of 100 pips for your risk exposure not to exceed $20.
Do you have a demo account that you can trial this on and see the actual figures evolving?
Thank you so much for your answer, it is clear now
And yes, I’m planning on opening a demo account soon to play a bit with it and get a better understanding of how the figures are moving
I think it is a good idea to run a demo account alongside your reading learning. It helps a lot to actually place trades, set up indicators, apply PA techniques, explore risk exposure, discover your preferred trading style (e.g. short term or long term charts) and develop a strategy that suits your style and lifestyle.
Hopefully, you will also continue to share with us how you are doing…
Yes, leverage lends for the trading place. And risk management is what you need to calculate. For example, I take a 2% risk for trade and manage a 1: 2 risk.
What is interesting is management of a small account, say $100 with a 100:1 leverage. Your broker controls your margin allowance, so that you cannot open trades that would exceed the margin. By increasing leverage to 200:1 your margin allowance would increase so that you could place more trades and/or at a higher lot size risk exposure.
If that was the case you would need to adjust your S/L to stay at 2%, but bear in mind, there will be reduced breathing space.the higher the lot size. Which means you’re more likely to get stopped out if trades moves against you.
Experimenting with differing lot sizes on a demo account would make it clearer.
A standard lot in forex is equal to 100,000 currency. It’s the standard unit size for traders, whether they’re independent or institutional. Example: If the EURUSD exchange rate was $1.3000, one standard lot of the base currency (EUR) would be 130,000 u
Loss or profit depend on the pip value and the size of loss (profit) in pips. You first calculate pip value on your leveraged position and multiply it by number of pips (distance of SL or TP from entry). Loss is deducted (profit is credited) to your balance.
It depends if you are basing your risk on your balance, or margin. If I say have a £100 account and risk 1% of that on a single trade then the only thing that changes is the margin cost of that trade. Higher leverage means I can place more of those trades but if I have a rule in my strategy that says for example no more than say 5 open positions at a time it will come a point where more leverage isn’t really needed other than an even larger buffer than I have.
The issue of risk is that a lot of traders see higher leverage as a way of placing larger lot size trades in greater number on a fixed account size and ignore risk management altogether.
Margin-based leverage does not necessarily affect risk, and whether a trader is required to put up 1% or 2% of the transaction value as margin may not influence their profits or losses.
This is where the double-edged sword comes in, as real leverage has the potential to enlarge your profits or losses by the same magnitude. The greater the amount of leverage on the capital you apply, the higher the risk that you will assume. Note that this risk is not necessarily related to margin-based leverage although it can influence if a trader is not careful.
Leverage can magnify the profits and risks with the same intensity. The amount of profits or losses depends on the leverage a trader is using. Use of high leverage should be avoided by the new traders or if the trader is not sure about the trade.
It is important that while using leverage traders should follow a strict risk management strategy.
Both profits and risks are attached to leverage. If you don’t have much knowledge of the market, I would suggest not to keep leverage too high. And if you are using very high leverage then money management measures should be in place to cushion you against any unforeseen losses.
The higher is leverage the tighter should be stop loss. Basically if you set some certain leverage the size of stop loss is usually determined by the size of loss in money terms in that trade. You just divide potential loss like 30 USD by pip value of your position and you get the stop loss in pips.
Leverage is a double-edged sword, which amplifies both profits and risks with the same intensity. Traders should never trade if they are not sure about the trade.
It can magnify both gains and losses. It can be a powerful tool, but if you are not very intelligent and experienced in using it, then it is best to spare yourself from using it. When you are using leverage, then you will be open to more risks which you may not control.
