Leverage

Beginner Questions
1

Hey All,

I understand leverage and how it allows a little money to earn (or lose) more.

Question/Example:

  • I have a $5,000 account
  • I am buying a 10,000 mini lot
  • I can do it with 10:1 leverage, use $1,000 of my $5,000
  • I can do it with 100:1 leverage, use $100 of my $5,000

Regardless of my leverage, the value of a pip remains the same (as I bought the same amount of currency).

So, what difference does leveraging have?

2

The answer is right there in your own figures. the higher the leverage the less margin you are using. Less likely to get a margin call assuming you don’t use that leverage to open more and more trades at the same time.

3

Ok,

So when people suggest risking 1-2% of your account on any given trade, do they mean:

  • The amount you would lose if your stop was hit = 1-2%
  • The full amount you have invested in the trade = 1-2%

Also, is the 1-2% risk meant to be on each trade, or on all active trades at one point?

I know there isn’t really any “fixed” rule, I’m more trying to understand the way people talk about it.

4

The general rule of thumb is no more than 2% total. so if you had two trades open then each one should be risking 1% of your account. And that would be 2% of the account balance. so if you had 5000 in your account then if your trade hit its stop loss then you would loose 2% of the 5000.
You have to adjust your trade size based on how big you think your stop loss should be and how much a pip is worth to make it equal 2% of your account.