Hello stylesheets,
The relationship is not reliable, because it’s not based on math. Let’s work through it.
You asked for a quick mental method for calculating the [I]actual leverage[/I] you are using when trading several positions simultaneously. Before addressing that question, let’s be clear on what the actual leverage is, when calculated correctly.
Notice that the [I]maximum allowable leverage[/I] offered by your broker, and the [I]actual margin amounts[/I] levied against your positions, have nothing to do with actual leverage used.
[I]Actual leverage used[/I] is simply the ratio of the total notional value of all your open positions combined divided by your account balance.
You gave the example of 500 micro-lots each of U/J, E/J, and G/J, in a $100K account.
So, let’s calculate the actual leverage involved:
For 500 micro-lots of USD/JPY,
the [I]notional amount[/I] = 500,000 units of USD, and the [I]notional value[/I] = $500,000
For 500 micro-lots of EUR/JPY,
the [I]notional amount[/I] = 500,000 units of EUR, and the [I]notional value[/I] = $548,970
(at Friday’s closing price for EUR/USD = 1.09794)
For 500 micro-lots of GBP/JPY,
the [I]notional amount[/I] = 500,000 units of GBP, and the [I]notional value[/I] = $780,780
(at Friday’s closing price for GBP/USD = 1.56156)
Total notional value of your 3 positions = $1,829,750
Actual leverage used = $1,829,750 / $100,000 = [B]18.3 : 1[/B] (rounded off)
You asked whether you could use the [I]% of margin used[/I] as a reasonable indication of the actual leverage you are using. Be cautious with that. Margins are not necessarily proportional to notional values.
To prove that to yourself, simply look at the margins currently required for 1 standard lot of USD/CAD versus 1 standard lot of USD/CHF. In each case, the notional value of a 1-lot position is $100,000. But, the required margins are very different.
If your broker is FXCM (US), then the margin required for 1 lot of USD/CAD is $2,000. The margin required for 1 lot of USD/CHF is $5,000.
And, at the extreme end of the scale, the margin required for 1 lot of USD/HKD is $10,000.
In the example you gave of 3 positions totaling 1,500 micro-lots, the actual leverage involved would be very different if you were trading [I]only[/I] USD/XXX pairs, versus trading [I]only[/I] GBP/XXX pairs.
In the case of USD/XXX pairs, total leverage for 1,500 micro-lots would be 15:1.
In the case of GBP/XXX pairs, total leverage would be [B]23.4 : 1.[/B]
Let’s back up now, and talk about risk, rather than actual leverage used.
In the example you gave (500 micro-lots each of U/J, E/J, and G/J) [I]— because JPY is the quote-currency (cross-currency) in each position —[/I] all three positions have the same pip-value, which is 8.07¢ per pip per micro-lot, or $40.36 per pip (rounded off) for each 500-micro-lot position, or $121.09 per pip for the three positions combined.
Note that, if something impacts the JPY such that price moves against you, it will move against all three of your positions simultaneously.
That pip-value of $121.09 per pip represents your true risk in this (highly correlated) “portfolio” of trades.
If your SL in each position is 50 pips away from your entry price, your overall risk will be $6,054.50 (that’s 50 pips x $121.09 per pip). Clearly, this is a bit more than 6% of your (hypothetical) account balance. And [B]6% is too much risk,[/B] no matter what style of trading you are employing.
You should cut this risk down to 2%. In other words, divide your position-size by 3. This will divide your actual leverage by 3, putting it in the range of 6.1:1 (that’s 18.3:1 divided by 3).
And now, all of a sudden, [I]actual leverage used[/I] doesn’t matter anymore.
As a general rule, if you control risk, by controlling your position size with respect to the depth of your stop-loss — then, actual leverage will take care of itself. You will never have to calculate it, or estimate it.
.