Hi Guys - please can I have some advice…
How should the size of your leverage influence the size of your trades?
People talk about not risking more than 1 or 2% of your account per trade - but what if my leverage is only 20:1?
What I find with the lower leverage is that trades use up a lot more margin and they also would have to have huge drawdowns to get near margin calls.
I feel it is a safer way to trade but if I only have a few open trades open then I sometimes trade larger sizes… I realise that cancels out the smaller leverage but only till the point where my available margin runs out and with 20:1 that is normally a long way away from a margin call…
It shouldn’t at all. Leverage only determines the size of trade you [I]can[/I] make. It isn’t related at all to the size of of trade your [I]should[/I] make.
People talk about not risking more than 1 or 2% of your account per trade - but what if my leverage is only 20:1?
You’re talking apples and oranges. Risk and leverage are not the same thing.
What I find with the lower leverage is that trades use up a lot more margin and they also would have to have huge drawdowns to get near margin calls.
Actually, the less leverage you use the less of a drawdown it takes to get a margin call. Do the math and you’ll see that to be true.
Hi John
Thanks for your response. I did the maths on leverage below, please tell me if it wrong…
Leverage 20:1
$100 000 account equity/net asset value
buy $500 000 EUR/USD
margin used $25000
margin available $75000
Leverage 100:1
$100 000 account equity/net asset value
buy $500 000 EUR/USD
margin used $5000
margin avail $95000
Oanda margin rules
The Margin Used (that is, the margin requirement of your open positions) divided by two must always be less than the Net Asset Value of your account.
on $500 000 1 pip = $50
20:1
100000-($25000/2) = $87500/$50pips = 1750 pips drawdown possible
100:1
$100 000-($5000/2) = $97500/$50pips = 1950 pips drawdown possible
I prefer to use a lower leverage so I impose a higher margin requirement on myself. That way it is easier for me to see a potential margin call sooner.
cheers
Brendon