hi guys.
am new here was asking is their any difference in using a high leverage while still risking the same % of ur account n using low leverage with still the same risk %.according to what i do understand,it all boils down to MM.!!
Hello daviso,
There are two types of leverage:
B[/B] The maximum allowable leverage offered to you by your broker — example: 50:1, 100:1, 500:1, etc.
B[/B] The leverage you actually use in a particular trade, which is determined by your position size and your account size.
I’m going to assume that you know this difference.
And, I’m going to assume that, when you say “using high leverage”, you are actually referring to (2) above. (If not, we’re going to end up running down a series of rabbit trails.)
Anyway, here goes —
• [B]Suppose an experienced trader (not a newbie) happens to be a true scalper.[/B] This trader takes very quick in-and-out trades, entering and exiting manually, using very tight [I]mental[/I] stops and profit targets, and generally employing [I]large position sizes[/I] relative to his account balance.
Example: this true scalper might have a $5,000 account, and might typically trade one standard lot (100,000 units of currency) at a time, looking for 5-10 pips of profit, with 5 pips of risk. In other words, this scalper has his finger on the trigger at all times. And he will exit his trade manually when 5-10 pips of profit has been accrued, OR when his trade turns against him, losing (on average) 5 pips whenever he bails out of a losing trade.
If you understand [I]actual leverage used,[/I] as in (2) above, then you know that this scalper is using 20:1 actual leverage ($100,000/$5,000). And you know that he is risking 1% of his account on every scalp that he enters ($50/$5,000). Note: here I’m assuming a USD-denominated account, and a trade involving a pair with USD as the base currency (such as USD/CAD) such that one pip per standard lot is worth $10. Therefore, a 5-pip risk = $50 risk.
• [B]Now, suppose that another trader happens to be a day-trader.[/B] This trader takes trades which he expects to hold for several hours (but not overnight), entering and exiting on pending orders (stop and limit orders), typically using 25-pip stops and 50-pip profit targets, and employing [I]much smaller position sizes than the scalper,[/I] above.
Example: let’s say that this day-trader has a $5,000 account (same as the scalper, above), and limits his risk on every trade to 1% of his account balance (same as the scalper). In other words, this trader calculates how large his position should be based on account size, stop-loss (in pips), the dollar-value of each pip, and his pre-selected 1% risk percentage. If his account is denominated in USD, and if USD is the base currency of the pair he is trading, and if his stop-loss is 25 pips and his risk percentage is 1%, then his calculation will determine a position size of 2 mini-lots (20,000 units of currency).
Again, referring to the definition of actual leverage used in (2) above, this trader is using 4:1 actual leverage. And, his risk percentage (1%) is just as high as the scalper’s, even though he is using much less actual leverage than the scalper.
So, as a general rule, we can say that a given risk percentage (1% in our examples, above) can be employed with any degree of actual leverage (from tiny to huge), provided risk in terms of pips is adjusted accordingly.
The scalper employed 20:1 leverage, risking 1% of capital on a 5-pip SL, looking for 5-10 pips profit.
The day-trader employed 4:1 leverage, risking 1% of capital on a 25-pip SL, looking for 50 pips profit.
A position trader, who enters trades expecting to hold them for weeks or months, might employ 1:1 leverage, risking 1% of capital on a very large SL, looking for hundreds of pips profit.
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One little clarification here. If you’re trading a pair with USD as the quote currency (e.g. EUR/USD) then the value of the position in USD terms is size x exchange rate. Thus if, EUR/USD is trading at 1.20 the value of a 1 full lot position is $120,000. That means the leverage being used on a $5000 account is actually 24:1 rather than 20:1. Not a huge difference on the face of it (though it’s 20%), but imagine if you were trading GBP/USD at 1.60.
If you’re focused on % of account risked, however, the leverage ratio is largely irrelevant.
Thanks for catching that, John.
I’ll edit my reply.
I think you guys did not understood the question.
Simplyfiyng, he asked the following, Whats the diference between 1 and 2:
- Balance 100.000,00 USD; Leverage 1:100; Investing 1.000,00 USD
- Balance 100.000,00 USD; Leverage 1:10; Investing 10.000,00 USD
I think pinto u got exactly what I meant, is their any difference!??
The whole “Balance” and “Investing” things is a bit confusing.
If you mean to ask if there’s any difference between risking $10 on a $1,000 (1%) account when the position size is $100,000 and when the position size is $10,000 then not really.
Leverage is certainly the double edged sword and thus the traders should always be very much careful in using very high leverage. And if one has good idea regarding the market movement then certainly they can be able to manage with leverage. But it is also noted that the percentage of losers are more with the increased leverage use.
Do you HAVE to use leverage though?
like, can I buy/sell AUD/USD using $4,721 if my account balance is $4,721? or does it all have to be in units with leverage?
I’m well confused.
You [B]do not[/B] have to use leverage.
But, your ability to trade odd lots depends on the type of account your broker offers.
• If you trade through Oanda (or any other broker who offers UNIT ACCOUNTS), you can trade any number of UNITS of base currency. This means that you could trade 4,721 units of USD/JPY, worth exactly $4,721. Or, you could trade 3,892 units of GBP/USD, worth approximately $4,721 at this morning’s GBP/USD price (1.21320).
You could also trade a position size that is much smaller than your account balance — for example, 10 units of AUD/USD, worth approximately $7.57 at this morning’s AUD/USD price (0.75707). You could even trade 1 unit of any currency pair, which would be worth $1 more or less, depending on the pair you are trading.
• If you trade through a broker who offers NANO ACCOUNTS (minimum trade size 100 units), then you must adjust your position size to multiples of 100 units. So, you can trade 100 units, or 200 units, or 300 units, etc. of any pair. You could trade 4,700 units of USD/JPY; or, you could 4,800 units. But, you could not trade 4,721 units.
• If you trade through a broker who offers MICRO ACCOUNTS (minimum trade size 1,000 units), then you could trade 4,000 units of USD/JPY, or 5,000 units of USD/JPY, or any other multiple of 1,000.
• If you trade through a broker who offers MINI ACCOUNTS (minimum trade size 10,000 units), then you could trade 10,000 units of USD/JPY, worth $10,000 — but, no position size smaller than that. If you did this trade in your $4,721 account, you would be using 2.12:1 actual leverage (10,000 / 4,721 = 2.118…).
• A STANDARD ACCOUNT (minimum trade size 100,000 units) would be out of reach for your account size. Any trade that you might consider (in your $4,721 account) would entail actual leverage in the range of 21:1 — way too high for a novice, in my opinion.
Note that UNIT accounts and NANO accounts are rare, but MICRO accounts and MINI accounts are common.
I hope that clears things up for you.
Undoubtedly you can trade without leverage. If your account equity is $4721 and price for AUD/USD is 0.7698, you can buy 6 micro lots of AUDUSD. To deal in Forex market ,for each transaction you require margin to place that trade. If you use leverage while placing a trade, margin required will be less.
Margin = market price of pair*lot size/leverage
With leverage you can trade more as margin requirement would be less and the unused margin can be used to trade elsewhere. But yes leverage increases risk and return both.
Hello !
I’m new at Forex, I don’t understand a thing. Can you explain me, please? I use a demo account and I’ve this situation:
I used a leverage by 1:1000, size 0.01 and a T/P at 100 pips. Profit was around 0.94$. After that, I changed the leverage to 1:500, same size by 0.01, same T/P by 100 pips and the profit was the same (0.94$). It shouldn’t be twice less because now leverage is twice less, from 1000 to 500?
So, doesn’t matter if account is 1000$ or 10 000$ or if the leverage is different, if you’ve the same size, you make the same profit?
I know it is a stupid question, but I’m a newbie and I’m a bit confused about this situation. What I understood from reading I wrote above, but looks like I don’t understood it right. Thank you !
No, you did not [I][B]use[/B][/I] 1000:1 leverage.
You set the [I][B]maximum allowable leverage[/B][/I] for your account at 1000:1.
Then, you placed a trade, using [I][B]actual leverage[/B][/I] that was much lower than the limit (1000:1) which you had set.
The resulting dollar-profit in your trade ($0.94) was determined by
(1) the pair you chose to trade,
(2) the size of your trade (0.01 lot) and
(3) the pip-profit (100 pips) which you earned
The profit in your trade [I]was not determined[/I] by the maximum allowable leverage you chose at the beginning.
Then, you lowered the limit (maximum allowable leverage) to 500:1, and repeated the same trade. And, naturally, you got the same result, because the result was not determined by the limit you had set.
Note that both trades (with 1000:1 limit, and 500:1 limit) were identical, meaning that you were using the [I]same actual leverage[/I] in both trades.
If you keep lowering the limit (maximum allowable leverage), you will eventually place that limit below the actual leverage you intend to use in the next trade, and your platform will refuse to enter the trade, telling you that you have [I]insufficient margin.[/I] Required margin is the inverse of maximum allowable leverage, so when you lower your maximum allowable leverage, you automatically raise the initial margin required to open a trade. Study these relationships, until they become part of your brain.
How can you determine how much actual leverage you were using in the trades in your example?
First, determine the [I]notional value[/I] of each trade. Then, divide the notional value of the trade by your account balance (at the time you entered the trade). The result will be a number like 3, or 5.2, or 7.5, etc.
3 means 3:1 actual leverage used. 5.2 means 5.2:1 actual leverage used, and so forth.
Determining the notional value of a trade [I]precisely[/I] can be tricky. If you want to know how to do it, write back, and I’ll walk you through it.
You can determine the notional value of a trade [I]approximately[/I] by simply [I]assuming[/I] that a full lot is worth $100,000 (regardless of the pair you are trading), a mini-lot is worth $10,000 (regardless of the pair you are trading), and a micro-lot is worth $1,000 (regardless of the pair you are trading).
Applying this to the trades in your example, the [I]approximate notional value[/I] of each trade was $1,000. If your account balance was $250 (just to pick a number), then the [I]approximate actual leverage[/I] used was 4:1 (notional value divided by account balance).
Welcome to this forum, by the way!
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Thank you so much, Clint !