I’ve decided I want to become a trader and I’m thinking about a “draft plan” to start. I was trying to calculate the margin needed to trade with the risk I’d like to take and I got confused.
Let’s say I have a 5000USD account, and I only want to risk a maximum of 1% of the account per open position and 2% max net losses a week.
So I’ll be willing to risk a max of 50USD (1% of $5k) per trade… and [I][B]here’s where I got confused[/B][/I].
[B]Example 1)[/B] I buy/sell 10000 units (one mini-lot) of EUR/USD using a 20:1 leverage, for which I need to use a margin of 500USD. I would use a 50pips stop loss, I’ll be risking 50USD (1% of the account).
[B]Example 2)[/B] I buy/sell 10000 units (one mini-lot) of EUR/USD using a 50:1 leverage, for which I need to use a margin of 200USD. I would use a 50pips stop loss, I’ll be risking 50USD (1% of the account).
What role does [B]leverage[/B] and [B]margin[/B] play in the risk I want to take?
I mean, I get the margin back when I close the position so is not part of the risk, isn’t it? And the leverage would just let me choose the amount of money I want to use for the position but as long I use a stop loss the risk is the same, am I right?
[I]I need some help on how to manage margins.[/I]
ps. I hope it’s not hard to understand, I tried to make it simple but I’m kinda confused after a few hours thinking about this
This is one of the most confusing things for new traders, so don’t feel bad for being confused.
You’re risk management plan is right on target!! The best thing you can do with leverage and margin is to ignore them! They play no role in your risk management.
Leverage or margin simply don’t need to enter your calculations. If you trade 1% of your account per trade and calculate your lot size with your stoploss and risk percentage (just like you did in the examples) then you will never even come [B][I]remotely [/I][/B]close to a margin call.
In your example you would not need high leverage because you are only trading 1 lot. In your example a 5:1 leverage is reasonable. High leverage comes in handy for traders who take high risk or place a number of trades per pariod. You also need high leverage if you purchse a lot of lots with very tight stops. In your example if you trade 5 lots with stops of 10 pips each, you are taking the same 1% risk but in this case you purchase more lots and need more leverage. The leverage has to do with the amount of units you want to trade.
Some traders purchase more than 1 lot with 1 or more stop rates and 1 or more limit rates.
Thank you both guys. I was beating myself up because of not knowing what to do with leverage and margin.
I just want to make sure I don’t miss anything important before thinking about a strategy.
Thanks again, I am loving babypips.
They play no role in your risk management.