I have a confusion about my platform in my broker.
In the courses in babypips, it says that “You may see margin requirements such as 0.25%, 0.5%, 1%, 2%, 5%, 10% or higher.” and "This percentage (%) is known as the Margin Requirement."
So for every pair, the margin requirement is specific. But when I open a new demo account in my broker, it asks me for choosing the Leverage (1:50-1:100 and so on).
I opened two demo account with two different leverages. It seems the margin required to keep open my positions is changing but I do not know how it affects the margin?
So my question is: What is this leverage and its role? and how it affects my positions with considering the fact that the margin requirement is certain and unchangeable for a certain currency pair?
Leverage allows you to trade with money that you don’t have. Without going into the actual reality of this when it comes to spot FOREX: in effect the broker is “lending” you the money (the difference required).
In other words:
At 1:1 leverage or 0% (no leverage) if the margin requirement to open a certain position would be $10 000 then you would need $10 000 in order to open that position.
At 10:1 leverage or 10%: you would only need $1 000 to open the same position described above. But here’s the problem: because of leverage you are now able to open a FAR larger position. So the amount of money that you are going to make or lose is amplified proportionately. So inevitably what happens is that new traders take far larger positions that they should, simply because they can, and will always blow up their accounts and obviously lose their capital.
Best advice and practice: go for an ABSOLUTE MAXIMUM 30:1 or 3.33% leverage and you will not be sorry in the long run (and 10:1 or 10% is even better) (and NO leverage is first prize).
Problem with the above of course: you need a LOT more capital. And therein lies the secret i.e. if you don’t have enough capital to trade with little to no leverage then walk away until you do have enough. It’s really that simple.
The reason your margin requirement is constantly changing is simply because price is changing.
In the hands of a seasoned professional trader leverage is not an issue (but this being said a seasoned professional trade will not trade with high leverage to begin with).
Thanks for your answer.
Let me ask the question on the other word.
When I open a 1000$ position with 1:50 leverage,
1- Margin (in meta trader) becomes 2 times as high as the margin in 1:100 leverage.(Which means, it decreases my free margin)
2- The margin level becomes 1/2 times the 1:100 leverage (which is bad I think as the lower margin level increases the chance of receiving margin call).
3- The pip value is the same for both leverages (0.1$/pip for 1000$ position)
When we say the leverage is a double edged-sword, I do not understand how it affects my profit or loss and endangers my trading, with considering the fact that the pip value for a specific LOT is the same for every leverage?
If nothing else: it’s nice to see the way you’re approaching this.
Correct. The pip value is the same lot for lot. But here’s the problem: with lots of leverage most will look at their available balance and think to themselves “hey: I’ve got all of this free margin so why don’t I open a larger position” or “hey: I’ve got all of this free margin so why don’t I go and open another ten trades on different instruments (pairs)”. Now while you may read this and think “nah: I’ll never do that”. Well??? I hope not. But that would put you in the elite and the top 1% of new traders.
Well, I hope I could control my greed and stay away from those feelings.
But actually I wanted to find the formulas that express why the margin and margin level in 1:50 become 2 times and 1/2, respectively in comparison with 1:100 leverage.
I wanted to know why my margin equals 12.46 in leverage 1:100 and 24.92 in leverage 1:50 when I open the GBP/USD position with 1000$ balance.