Hi, I’m Steve from the U.K. Up until a week ago I’d never even heard of Forex trading but a chance encounter whilst browsing the web really made me stop and think about this crazy pastime/hobby/job. First off let me explain that I have no prior knowledge of stocks and shares or investing money whatsoever, heck I just fix pharmaceutical packaging machinery!. But I am reasonably good at maths and the idea of charts and graphs combined with money management formulas blah blah… I thought why not have a go.
After finding the BabyPips site I started reading the School section which is fantastic for a newbie like me and I’m learrning loads of cool stuff. The only problem is for reasons I can’t explain is the concept of leverage. It’s not because you’re explaining it badly because hell I’ve checked out loads of places on the net that confuse me way way more than you. I know it’s basically “controlling big money with small money” and there are hundreds of analogies out there. So all I wanna know is… If I open a demo account with a leverage of 2:1, what will I “see” physically, in my account and in my trades that would be different than if I have a leverage of 100:1. This thing about leverage is mad, If I’ve got a $1000 in my account then I’ve got a $1000 in my account right? If I’m crap I can only lose $1000 and if I’m really good I could make a couple of hundred bucks so what is this leverage everyone’s talking about. Sorry if I sound really stooopid!
You won’t [I]see[/I] anything different - at least not at first blush. Leverage only allows you to put on larger positions than otherwise possible, and obviously at 100:1 leverage you can put on trades 50x the size of an account with only 2:1 leverage - if you so desire. Higher permissible leverage also means lower margin requirements on trades you enter.
By the way, it is theoretically possible to lose more than your account balance - at least with some brokers. That is something you’d want to check in the fine print for when signing up.
Leverage allows you to trade with more buying power than your deposit provides. This can work for you, as well as against you. Please remember the principal rule of financial management: greater profits and higher risks are intrinsically correlated. Just the same, high leverage is associated with significant risks. When leverage is 100:1, every dollar on your deposit allows you to purchase up to 100 units of another currency. For example, with a deposit of $1,000, you may purchase 100,000 EUR/USD, or 100,000 GBP/USD or 100,000 AUD/USD.
Leverage is a ratio of Trade Size/Deposit. This means that by controlling this ratio you can control your leverage and hence risk exposure. For example, if you have $1,000 on your deposit and you purchase 100,000 units of another currency, your leverage is 100:1 (100,000/1,000=100), but if you purchase 30,000 units of another currency your leverage is 30:1 (30,000/1,000).
If you purchase 1,000 units your leverage is 1:1 (1,000/1,000=1).
The dangers of using too much leverage are rarely talked about, but are pretty obvious if you think about it. This doesn’t mean that you have to use the full amount of leverage just because it’s there. In fact, there are ways to use leverage in useful ways that will give you an advantage.
A good time to use leverage is when adding to a winning trade. If you have a trade that has progressed favorably and you want to add to it, this is a good use of leverage. This is called leveraging your profits.
Overall the best use of leverage is when position trading. It’s tempting to use extreme leverage to make a fast profit on single trades, but the risks are just not worth it.
Leverage is a game that banks created to suck on our money…:27:
but if you created your own leverage game by choosing the best ratio , wich will probably not be a 1:4 niether a 1:400 … and keep on trading micros you will actually beat these guys:48: … Good Luck
Actually, [B]trading[/B] in general is the game banks (and brokers) use to suck out our money as they take a slice of the action. Leverage is just about how big a chunk we give to or take from the guy on the other side of our position.
Thanks guys, some good answers there.
So here’s a senario.
I open a demo account with $10000 and a leverage of 4:1
I enter a trade at a volume of 1 (or $10/pip) with a stop loss of 100 pips and a take profit of 200 pips.
I’m assuming that’s risk/reward ratio of 1:2 and I’m risking 10% of mt account. I could lose $1000 or gain $2000 right?
Say the price rockets up to within 5 pips of my TP level I could
a) Wait and hope it reaches my TP level and gain $2000
b) The price drops during the next few hours and hits my SL and I lose $1000
c) Using my 4:1 leverage at “Full power”… What??
Also why use leverage when I’m told never to risk more than 1-2% of my balance per trade?
If you use 1 or 2 % you may not need leverage. However if you open several trades then that could consume enough of the account to use margin.
I’m not saying it’s right or wrong just an observation.
Some brokers close a trade in an account when margin is gone so if that’s the case you could say make one trade using 95% of your margin. If you loose 5% it will attempt to close. This is a high potential to make a lot. If the broker does not operate this way you could sustain more loss and maybe more than your account balance.
So it depends on your brokers policy and the risk your willing to take.
Interesting matter surely. However I would say that high or low lavarage is neither good nor bad. It is just the matter of your own risk appetite and the way you manage with funds and risks.
If a new forex trader uses high lavarage but plays on microlots, it’s a good way to:
- learn earning on Forex
- engage low funds
- limit risk of lose.
Good luck everyone 
All the best,
Adam
Account Manager, IronFX.com
leverage and risk % are related components and you should study them carefully.
new traders should risk much less - about 0.5 to 1 percent per trade… and use a leverage of 50:1 and less. This ensures account longevity
there is plenty on leverage and risk etc here on site in the babypips school. Start here Lots, Leverage, and Profit and Loss | How Do You Trade Forex? | Learn Forex Trading and work your way through.
Hey steve,
Leverage is only required if we don’t have enough money to put in to the Forex market. If you have like billion dollars (just for example) or so to play with, you can directly trade Forex through a bank without any leverage. In the Forex market you should place big orders. That’s how it works.
But most of us don’t have that kind of money to play with. I mean, to really play with, without caring even if we loose it.
So we small traders need a way to trade, right?
That’s where brokers come in. Brokers had provided us with a nice solution. Deposit how much you choose to play with and use leverage. If you have, for example $30,000 or more you can use less leverage like 100:1 or 50:1. If you plan to deposit only $500 as a learning account you must choose higher leverage like 400:1, otherwise you will not have enough margin to trade with. (Margin is an amount you must set aside in your account, it may differ depending on your broker).
Bottom line is, we need leverage to trade the Forex market as we don’t have money to place big orders. Got the point?
[B][U]How does Leverage works?[/U][/B]
I open a demo account with $10000 and a leverage of 4:1
I enter a trade at a volume of 1 (or $10/pip) with a stop loss of 100 pips and a take profit of 200 pips.
I’m assuming that’s risk/reward ratio of 1:2 and I’m risking 10% of mt account. I could lose $1000 or gain $2000 right?
Say the price rockets up to within 5 pips of my TP level I could
a) Wait and hope it reaches my TP level and gain $2000
b) The price drops during the next few hours and hits my SL and I lose $1000
c) Using my 4:1 leverage at “Full power”… What??
If you use 4:1 as leverage and your lot size matches $10/pip ;
When you place a order of $10/pip it goes out to the real forex market as $10 X 4 = $40.
(Your broker will have lot of orders at one time, so your $40 is just a part of a big order going out of your broker.)
But your account will reflect it as $10 a pip. Initially your trade will show you a loss depending on the spread your broker charges. (If it is a commission based broker you may not see this initial loss).
If spread is 2.5 pips for EUR/USD you will see 2.5 X 10 = -$25 loss initially.
If you are 200 pips up then it’s 200 X 10 = $2000 and if you are down 100, it’s 100 X 10 = -$1000 as you correctly assumed.
[B]If you use 400:1 as leverage:[/B]
Even if you use a higher leverage you can still trade $10/pip. Only your lot size (volume) will be different. You will trade a larger lot when you use 4:1 leverage and you will use a smaller lot when you use 400:1 leverage. And you will need a larger account (with more money) when you use 4:1 than when you use 400:1.
Still you will gain $2000 or loose $1000.
A lot size in a Standard account which uses 50:1 is different to a lot size of a Micro account which uses 400:1.
There is no danger in using higher leverage. It is only dangerous if you trade larger lot size (larger than your capital can handle) in any type of account, standard or micro.
Also why use leverage when I’m told never to risk more than 1-2% of my balance per trade?
Yes, never risk more than 1-2% of your capital. This doesn’t concern your leverage. You can have 50:1 leveraged Standard account or 400:1 leveraged Micro account. In both cases manage your lot size to risk only 1-3% of your balance in the account. If you do that, leverage is not dangerous. Leverage is very dangers when people choose not to discipline them self and risk like 50% of their balance. When they get ripped out within minutes they blame it on leverage and all sort of things.
To get a better idea about the lot size you must open a demo account with your broker. Otherwise it’s very hard to understand.
I had successfully traded using 400:1 leverage. I’m speaking by my experience.
As you had just started, let me tell you;
It will take like 3 years for you to master the market as most of them say.
But you will think that you are better than others and you had captured it before 3 years, as we all do.
Then you will start loosing your accounts, few times. Learning a lesson each time. As it happened to all of us.
Eventually you will mature, will be more disciplined. Understand it’s nothing but trading psychology that matters.
My advise is, find a statistical edge (most difficult part of trading), demo practice it for 6 months until you learn everything about trading and the platform. Then open a real Micro account and further practice it for another 3 years. Real trading is very different. Can’t even compare with Demo trading. You will develop your trading psychology by real trading, it must happen by experience.
I know you will not listen to me, neither did I when I was told the same, 4 years ago here at babypips. 
Just my 2 cents…
Thanks, that’s just the answer I needed. Finally explained in real world terms for a complete “dummy” novice. Now I understand, thanks. Also thanks for all the other replies guys they were very helpful.
Steve.
You are welcome. I’m glad that you understood. :35:
It’s just my time around to return the favor to babypips.com :57:
is this related to bonus conditions ?
which bonus conditions?
Are you talking of deposit bonuses?
For example, leverage 2:1,
you buy $10 USD, you only spend $5 USD, the broker will let you borrow the rest, you pay them back when you sell your $10 USD.
In forex, the broker will hold your $5 USD. If you have $50 in your account, you will have $45 left, during the trade, your $45 can go up or down if you are making profit or lost.
We must make use of Leverage carefully as many times the traders fail to understand the impact that it has on their trading instincts.
The urge to earn more profits is what causes them loss in the first place 
maximum leverage on real account in first Years should be 1:5, more are acting only as disadventage !
Leverage in simple terms is nothing but the money which you are borrowing from the broker. Suppose you have invested $100 and have 1:100 leverage, this means that you can trade for 100X100=$10,000 worth orders. There are high possibilities of making good money and also you may lose money. Thus, use the leverage properly because its a “double edged sword”.