Leverage & Volume question

Hi All

New to forex, read a little and now trying to get to grips with Meta Trader and understand
the exact science of leverage and volume.

I have set up 5 different leveraged accounts to understand the impact on margin and
fiddle around a little to learn. I placed a .10 volume trade on each account for the same pair
give or take a few pips in the time it took to place the identical trade for each account.
I was expecting to see greater profits/losses for the higher leveraged accounts, however the
results are the same for each trade in each account give or take a dollar.

Can someone hammer home to me what I am missing here, is it simply the lower the
leverage the greater saftey cushion of margin ? My results below…
I thought more leverage = more risk = greater profit or loss per trade if identical volume trades
were used with the same amount of balance equity.

Leverage 10 to 1 50 to 1 100 to 1 200 to 1 500 to 1
balance 5000 5000 5000 5000 5000
Margin 1296.7 259.34 129.69 64.84 25.94
free margin 3978.68 5016.04 5146.01 5210.44 5250.17
margin level 406.83 2034.16 4067.93 8135.84 20339.67
equity 5275.38 5275.38 5275.7 5275.28 5276.11
profit 275.38 275.38 275.7 275.28 276.11

Note to self
Equity Plus Profit or loss / used margin

         407%	2034%	4068%	8136%	20340%

Any pointers warmly appreciated

Ok… from what I understood, you placed the same position size on the same currency pair on all your accounts, right? If that is the case, then the value per pip for all your trades was the same. Hence, all your trades gave you approximately the same results. All that the different leverages did was lock up different amounts as margins. So, in essence your results would have been different if you had put on positions of different sizes on your various accounts.

More leverage allows more value in positions to be open with the same amount of your money in an account. The fact that you have more position value the amount of potential lose or gain is greater.

If you use half of the available cash then the loss gain is the same at 50 to 1 margin as it would be at 25 to 1 using all your cash.

Let’s say you use 80% of your cash with 50 to 1 margin with a 20% loss buffer. That’s not possible with 25 to 1 margin.

I normally use 90% or more of my available margin at 50 to 1.

Thanks guys. The maths isnt 2nd nature yet.
Which is really annoying me.

I have read some posts reference margin calls and differing brokers offering different base levels which margin cannot fall under. Is there anywhere in meta trader I could see a setting or property for this. Or will it by default set to 0% margin = and then automatic call is made ?

Any tips on volume ? On other program’s when making a trade the cash value of your trade is also represented as well as lot size. I have a calculation somewhere to establish risk and then lot size, it’s my next challenge to under if there is any difference between Lots and volume its a little confusing.

Thanks again

Leverage will determine your margin requirement. The higher the leverage, the lower the required margin.

Let’s use 1 single lot size to illustrate an example:

If your chosen leverage is 1:100, the margin required to enter a position is $1000. Basically, $100000 / 100 = $1000.
So if your account has $10000, $1000 will be ‘locked away’ as required margin to enter a position. You are then left with $9000. If your trade loss is $100 and you close the position, you will get remaining equity of $8900 + the margin of $1000 = $9900.

If your chosen leverage is 1:400, the margin required to enter a position is $250. Basically, $100000 / 400 = $250.
So if your account has $10000, $250 will be ‘locked away’ as required margin to enter a position. You are then left with $9750. If your trade loss is $100 and you close the position, you will get back remaining equity of $9650 + the margin of $250 = $9900.

As you can see, the losses has got nothing to do with your chosen leverage. The leverage merely determines how much margin is required to enter a trade.

Hope this helps.

Hello, I am once-again wrangling with this margin calculation. You would think by now it would have sunk in, but I’m just not a math person. Or maybe I just need to have it beat into me repeatedly…

So here is my question… tell me if I’m thinking about this all wrong, I’ll really appreciate it:

In my trading system, I use a fixed R:R of 3:1. Then I equalize all trade position sizes so they are all essentially the same risk-per-trade. At that point, I’m ONLY looking at the visual pattern, not concerning myself if one trade is heavier-weighted than another.

So in this scenario, I know that (for example) each trade will be 2% of my account equity max risk. That allows me to place also a fixed lot size on the trade at entry, based on my stop level and taking into account the price-per-pip and account leverage.

Please tell me if this logic is wrong:
Since I know each trade is risking exactly 2% of the account equity, that means in a worst case scenario the account loses 2%. If I have 10 trades that all result in loss, that would be 10 x 2% = approx 20%.

Based on this, I am trying to figure out how many trades I can have open at once without risking a margin call. With 2% risk per trade, does that mean I can have up to 50 trades open at once? That doesn’t seem right.

Thanks in advance if you can clarify for me! I’m just trying to figure out how many positions I can take at once, based on my account equity and risk size (which determines the lot-size I take per trade).

Yes, if you have guaranteed execution at stop loss price to be 2% of your equity at the time of the first trade for all trades then 50 such trades will consume the equity that you started with when you placed the first trade if all trades go to stop loss price at the same time.

Where you might be having a problem is the equity changing all the time which if were up and you based a new trade on that amount then you would be risking more equity if the winning trades turn back to loss.

After a trade closes at the stop loss or at the profit price then the next trade would need to be recalculated.

If it is a loss then that amount of money needs to be subtracted from your original amount at start of first trade. If it’s a profit it would be added.

Why is every new member asking this question? Don’t they read the school, or is the section in the school not clear enough?

Well its one thing to understand equity and margins. It’s another to maintain balanced risk at a consistent level of risk.

When a trade closes the amount of equity changes and so does the risk level for all open trades. Therefore if new trades are balanced with open trades the percentages of total margin risk changes.

If you had to balance all trades and risk you would need to transfer funds to and from the account as trades close.

If you want to adjust the risk otherwise you need to begin using more or less open trades to adjust to margin changes.

Thank you very much for taking the time to explain this.

Where you might be having a problem is the equity changing all the time which if were up and you based a new trade on that amount then you would be risking more equity if the winning trades turn back to loss.

After a trade closes at the stop loss or at the profit price then the next trade would need to be recalculated.

If it is a loss then that amount of money needs to be subtracted from your original amount at start of first trade. If it’s a profit it would be added.

I use an EA that automatically ensures the 2% equity risk (ie adjusts purchase lot size for the entry order) so I do know that it is dynamically adjusted per current equity level and I verify this continually. Pretty much the only thing that is not factored is slippage which seems negligible from what I’ve seen so far.

Aside from the fact that my broker may issue warnings or begin closeout proceedings at a particular level (I am using IBFX, I think there is a level this happens – 50%??) … is it fair to say that I can still rest comfortably knowing my total equity risk at the time of each trade placed?

For example, if I have 10 setups configured for entry (which the EA would manage and dynamically adjust entry lot sizes on)… and due to market events, they all trigger entry simultaneously… then is it fair to say that my max equity risk is still 10 x 2% = 20% ?? That is what I think, I just wanted to hear someone confirm that for me.

The reason I am asking this is for 2 reasons: #1) I want to know if I have any reason for concern where the volume of trades taken would cause a margin closeout situation. I certainly would not take 50 trades at once, but it is definitely possible that I could take 10 trades simultaneously each at 2% risk. #2) Also, I want to explore the possibility of whether or not 2% is the proper level for me. I want to explore balancing the system risk with opportunity. In other words, perhaps I could take 5% risk on each trade and thus grow the account quicker. At 5% with typical 10 trades simultaneous, that is a 50% max drawdown risk in worst case scenario. But keep in mind I’d base the figure on system performance studies which would show 3:1 reward ratio and 50%+ typical accuracy.

Thanks again for your input, I really appreciate it.

Your thinking on the numbers seem right on.

Slippage may get worse at times. A sl or tp close may be considered an attempted close in which price may change and if it does will it still close or will it be re-quoted.

Some brokers give warnings on closeout for margin calls, some have a closeout like your stating at a percentage, and some close immediately when margin runs out.

What will close also needs to be considered. Pair with greatest loss first, fifo, etc.

I can’t say what’s best for your risk but consider this as an observation.

I have instantaneous closeout attempt at $0 free margin on an account.

If I place a single trade equal to 90 to 95% of available margin I am essentially risking 5 to 10 % of my account without a sl.

Having other accounts for other simultaneous trades of the same nature.

This would not work for multiple trades in the same account because one at a time would close exposing more equity.

Let’s say we start the day in one account with $1500. 50 to 1 margin.

Make a couple of winning trades and close out everything for the day and end up with $1800.

The best thing at that point might be to transfer the $300 to an account that your not using for the day or one you want to add equity to. Start again with $1500.

Hey RoadKing, that’s an interesting idea, I’ve never heard of doing it that way before.

Are you doing it this way because of the guaranteed closeout (ie, to completely eliminate slippage risk)?

Separately, have you heard of something called Kelly Criterion as a way to determine lot size for a system? I’m studying this now – wondering if you have any thoughts.

I do have one more question along this subject line. Related to using Kelly Criterion as a method for choosing the optimal buy size:

If I use the Kelly formula, it gives a very high optimal percentage (of equity that should be risked per trade). I think this formula would work well in my strategy, since my reward ratio is fixed at 3:1 or better, and because i have evidence to support a historical accuracy of at least 50% (I’m using 40% to be extra conservative).

I know that my brokers limit of active trades would be max’d out quicker if each trade risks a high equity percentage. Therefore, aside from trying to figure out where that max actually is… is it safe to assume that the only negative here would be lost opportunity, in the event that my system wants to open more trades but the broker says ‘nope too much margin tied up already’? I think that is probably the case.

It seems to make good sense to me, assuming I can handle the psychology and follow the trade rules mechanically. This seems like an ideal way to grow an account when the risk is measured and the accuracy is known. What is the ‘gotcha’ I’m missing here?