LOW leverage is in fact dangerous. WTF I am saying that?
It is simple - to get the same profit you need to invest and thus risk more money.
Lets say you want to trade 1 lot of EURUSD with SL/TP=100 pips.
With leverage of 1:3 you need 100000*1.12/3= $37,000 to cover the margin so you have to have account of $40,000 to trade 1 lot.
You are risking these $40,000 as anything could happen.
With leverage of 1:500 you need 100000*1.12/500= $224 to cover the margin so you have to have account of $1000 to trade 1 lot.
You get the same profit or loss on both accounts for trading 1 lot. Lets say profit of $100.
For 40k account it is just 0.25%
For 1k account it is 10%.
So it is much better to have 40 accounts of 1k with high leverage and diversified portfolio of broker/pairs/strategies than having one 40k account.
As you have correctly pointed out, the amount of money you risk per pip is determined by your trade size. A trade size of 1 standard lot (100,000 units or 100K) on EUR/USD risks $10 per pip regardless of whether you are required to put up $37,000 as margin for that position or $224.
That said, it’s important to understand that the risk you personally choose to take on as a trader is not your only risk when trading forex or futures for that matter. In markets like these, where traders use leverage, you must consider the financial responsibility demonstrated by your broker.
Is it wise to trust your money with a broker that offers 500:1 leverage to attract customers with no regard for the potential risk to the firm or its clients? The danger to you, if such a broker has not required adequate margin from its clients for the risk they take on in the market, is that your own money can be at greater risk due the losses incurred by other traders and your broker.
Yes.
The point of this is that to trade 1 lot EURUSD A. without leverage you would need $118,800. This money has to be deposited to your broker and you can possibly loose them all.
The profit from the position with defined stop loss and TP would be $100. So you in fact would risk 118 000 to get 100 profit. B. With leverage of 1:1000 you would need $118,8 so can comfortably trade with 1000 deposit. This money has to be deposited to your broker and you can possibly loose them all.
The profit from the position with defined stop loss and TP would be $100. So you in fact would risk 1000 to get 100 profit.
The risk of position going against you could be limited by other (than leverage) ways including good old stop loss.
Personal trading risk: If there is a market gap, then a stop loss order may not close your position until a substantially worse price than you anticipated, possibly resulting in a negative account balance.
Broker financial risk: A broker that offers 1000:1 leverage is requiring only 0.1% margin. At the time of this post, the EUR/USD exchange rate is 1.1877, so their margin requirement wouldn’t even cover a 12 pip market gap.
I’m confused with this too… i feel that the higher the leverage, the less i have to have in my broker’s account. I was comparing a 1:200 and 1:500 account and to trade 0.30 lot:
1:200=
Margin required: 243.19
free margin= 180
1:500=
Margin required: 73.54
free margin= 341
so there is so much difference. if the market is going to go the opposite, i’m going to lose more on the 1:200 leverage. Please correct me if i’m wrong?
I am also still prefer use high leverage usually, as small trader with low capital if choosing high leverage will having more opportunities to open trades because margin requirement is smallest than use low leverage, but if facing margin call account will possible to losing all money
Actually the margin call and automated stop out are there to protect the account from further losses and from it going below 0. The higher the leverage the slower automated stop out is triggered = the loss is getting greater if the market is going against you = the chance to lose all of the money is increasing.
I really believe that you need to focus more on proper risk management instead of requesting from your broker to “lend” you more money, so that you can open bigger lots with less capital and hoping that at some point the market will go in your direction…I am sorry, but if you need leverage higher than 1:200 you are more gambling and not trading oriented.
Having trading capital in reserve via increased leverage is not all about increasing the Lot size of your positions, it also allows you to cover more pairs, with sometimes smaller lot sizes (ie: basket strategies) offering more opportunity to profit.
Why open an account with $2000 @ 1:50 leverage when $200 @ 1:400 can give you similar fire power with only 10% of the risk if you blow the account…?? A 1:400 leveraged account loses the same amount of money as a 1:50 leveraged account when a position goes against you…
0.1 Lot (100k) = 1:50 ($244 Margin) verses 0.1 Lot (100k) = 1:400 ($30.50 Margin)… are we being subliminally educated to transfer ever larger sums to the Broker…??
Multiple accounts across multiple Brokers for 50% ($1000 across 5 accounts)…a risk aversion strategy against a malevolent Broker in itself… (Don’t place all your eggs in the one basket…)
Money and Risk Management strategies are not all based on the leverage…
I agree on that but still if you want to invest in more assets you should also be able to afford it and not rely only on that your broker will lend you more money which you can risk. Of course if you are trading with market maker you can get 1:1000 without problems as market makers don’t care if you are account goes in minus as this will generate more profit for them and they don’t have to pay money to a third party.
I believe trading should not be consider as “How much will I lose if you lose everything” but as “How to manage effectively my invested money (without risking it all) to make more money”. If you want to trade 0,50 lots (50 000 units) of EURUSD with 10 pips SL for example, with 200$ and 1:400 you are risking 25% of your balance on one trade.[quote=“Trendswithbenefits, post:12, topic:112433”]
A 1:400 leveraged account loses the same amount of money as a 1:50 leveraged account when a position goes against you…
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That’s right but loosing $50 on a $200 account is not like loosing $50 on $2000 account. On $200 it means that you don’t control your risk and on $2000 – that you are using appropriate risk management. [quote=“Trendswithbenefits, post:12, topic:112433”]
0.1 Lot (100k) = 1:50 ($244 Margin) verses 0.1 Lot (100k) = 1:400 ($30.50 Margin)… are we being subliminally educated to transfer ever larger sums to the Broker…??
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Is there a difference if you lose $1000 on broker or $1000 on 5 brokers with $200 each?[quote=“Trendswithbenefits, post:12, topic:112433”]
Multiple accounts across multiple Brokers for 50% ($1000 across 5 accounts)…a risk aversion strategy against a malevolent Broker in itself… (Don’t place all your eggs in the one basket…)
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I agree on that as an option but IMO more than 2 brokers at the same time makes no sense to me if I only have $1000 available for trading. And why would you trade with malevolent Broker at first place?[quote=“Trendswithbenefits, post:12, topic:112433”]
Money and Risk Management strategies are not all based on the leverage…
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True that! But if you don’t have the capital to afford opening bigger lots (on single trade or with more smaller trades), don’t act like you do by relaying on the leverage.
PS: I am not arguing. Different people have different points of view and different understandings
Hi @eyedfondue, no argument…absolutely agree, everyone has a differing view on their own appetite for risk and monetary strategy.
Unfortunately, a large percentage of new traders do blow an account or two early in this journey.
$50 is $50 deducted from any account size, with $150 (1:400) you still have enough funds to hopefully learn from the experience and trade you way back to profit.
Yes, there are so many brokers luring you to give them your money, so researching is a key before choosing. And also yeah – blowing an account is usual for every trader
Cheers
Well I feel leverage is a subjective concept for most f the traders. Some like to rely on high leverage while other likes to keep it low for the risk purposes. Everything has its own pros and cons. So does trading on leverage! Basically leverage gives you an opportunity to boost your trade returns. However, it can also bring fatal losses in case of a wrong trade. Many believe that leverage can put a trader under higher risk as the magnitude of potential losses increases on account of leverage.
