How Leverage affects our trading?

Hello everybody. i have a little confusion about Leverage as how it affects trading ?
I totally understand that Leverage is the amount contributed by broker in a trade. After we close any trade, leveraged amount goes back to broker as we liquidate our profits and loss. My point is if we have very little leverage ratio for example 1:2 , we would need massive capital to make any trade of lot size 0.1 - 1.0 .

I have heard people saying that, high leverage makes margin level too much volatile.
My question is how does Leverage effect our Margin level ? and why do our margin level remains more stable with less leverage …

Probably pay to go through the leverage section again in babypips. Margin level is just a ratio of equity / margin used. If you have a position leveraged at 1:10 any movements in that position are going to be 10 times greater on your account equity(+/-) as opposed to having a lower leveraged position.

The higher your leverage, the higher the margin requirement. I don’t think it makes things more volatile, but if the price of a pair is moving all around and you have a large position in it, then that can make it seem more volatile because a few small moves in the price can wipe out your account. So if you risk an appropriate amount of money, and the market moves around some as it is natural to do, then you are safer.

I was also going to add that you should pick your leverage amount based on factors related to your situation. I’m new at this so someone chime in if I am giving bad advice. You want to make use of leverage because it is offered to you. You don’t have to take everything they offer you. This is the same idea that you should not listen to the bank when they tell you that you can afford some rediculous amount of house that you cannot afford. I think you have to look at your trading system and identify what is the optimum amount of leverage to use based on how profitable your system is. If you use too much leverage, then you risk losing too much on bad trades. If you use too little, then you don’t make anything. If you use so much leverage that you have to set your stop too close, then your stop gets taken out by the noise if the market. So for example when you are placing a trade and you are risking 2% of your account, if you use higher leverage your stop has to be closer because your value per pip is higher and you will hit that 2% number faster. You can start out with lower leverage and then raise it over time but you must have some stopping point that is a reasonable amount. That allows you for more opportunities to learn while not losing your account.

Thank you very much, that actually makes sense. But it would be more productive for me, if i get to know the actually mathematics involved in calculating influence of leverage on a trade.
For example how much margin level increases or decreases with every unit change in pip. Like if i have got an account with $ 1000 capital with 1:100 leverage and i put a BUY with lot size 1 on EURUSD at 1.3050 .
margin being used for this trade is $ 130.5 . margin level shall be 766% at the begining of the trade. If i put a stop loss of 50 points. My question is how and why leverage 1:100 put an effect on 766% margin level and how much an increase or decrease in 1 pip will make change in margin level, since value of 1 pip is 1 USD.

1 lot is 10,000 units in a mini account I believe.

If you take the current equity in the account and divide that by the margin being used and then move the decimal two places to the right, that gives you the margin %.

(1000 / 130.5) * 100 = 766%

If you are buying 1 lot of Eurusd in a mini account that’s 10,000 units and you take that multiplied by how much a unit costs 1.3050 = 13,050. If the value goes up by 1 pip, then it becomes 1.3051 which will then mean your position size becomes 13,051. That means what you are now borrowing is more relative to the rest of the amount in your account. Let’s calculate your used margin now:

Margin = (Standard Mini Lot * 1.3051 * number lots) / Leverage

which gives us

(10,000 * 1.3051 * 1) / 100 = 130.51

So it looks like 1 pip movement is moving your used margin from 130.50 to 130.51. If your account is in US dollars, then the 1 pip movement will result in a $1 dollar change in your account. 50 pips would be $50. So you are risking 5% of your account on the trade if your stop gets hit.

Excellent and to the point :slight_smile:

Sorry but you’re wrong here it should be: The higher your leverage, the lesser the margin requirement.

Unless what is the point of using leverage.

Leverage does determine how much of your capital will be deployed to your trade. For example if you trade 0.10 lots and have leverage of 1:100 more capital will be used for that trade than if you trade 0.10 lots with leverage of 1:200.

For me leverage is a great tool to trade because I have small amount for trading. It gives me a chance to earn some good bucks with my small investment but it also expose me to loss. I am ok with it as this is the trading.

Trading is a great tool, but traders need to know how to use the tool otherwise the tool will use them.