**musicguy1967,** you’ve gotten good answers from **krugman25** and **JonesCario.**

But, I’m wondering whether it’s clear to you which type of leverage you are asking about. If you are not aware that there are two leverages at work in every trade, then we have identified the source of your confusion.

**• Maximum allowable leverage** – *this is the most you are allowed to use.* This is the leverage your broker advertises. Typically big numbers, like 50:1, 100:1, 500:1, even 1000:1.

*In terms of maximum allowable leverage,* the answer to your question is: The higher the maximum allowable leverage - the better. This is the leverage krugman was talking about, when he said that high leverage is a good thing.

**• Actual leverage used in a particular trade** – *this is the modest leverage you actually use, as a prudent and disciplined trader.* It is simply the notional value of your trade (prudently sized) divided by the balance in your account.

*In terms of actual leverage used,* the answer to your question is: Determine the size of your position based on Risk, and ignore leverage altogether, because it will take care of itself. This is the leverage JonesCario was talking about, when he said that leverage is a two-edged sword.

Let’s compare two identical trades in two different accounts, to illustrate the value of high maximum allowable leverage.

For this comparison, let’s use extreme values, in order to make a point. Let’s say that maximum allowable leverage in one account is 10:1, and in the other account it’s 1000:1.

Now let’s say that each account has a balance of $2,000 and no open trades. Our two traders (let’s call them Trader A and Trader B) enter identical one-mini-lot positions, each with a notional value of $10,000.

A simple calculation reveals that each trader is using actual leverage of 5:1 (that is, notional value ÷ account balance = 5). In other words, both of these trades are well below the leverage limits imposed by the brokers.

Trader A’s account, with maximum allowable leverge of 10:1, requires 10% margin on each trade. Trader B’s account, with maximum allowable leverage of 1000:1, requires 0.1% margin on each trade.

In other words, $1,000 of Trader A’s balance (that’s half his balance) is tied up in margin on this one trade, and is not available to be used by him for any purpose, for the duration of this trade. Trader B, on the other hand, has only $10 of his money tied up in margin, and is able to deploy most of his $2,000 balance in other productive ways. This is what krugman was referring to, when he talked about making efficient use of capital.

Both traders will have their margin amounts released back to them, when their trades are closed. But, for the duration of these trades, Trader A’s account is severely handicapped, compared to Trader B.