Hi everyone. I love this site and am trying learn as much as I can. I have a couple questions that are holding me back.
My goal is to trade a small account $1000-$5000 USD and hold multiple positions (1-6) simultaneously. They would be uncorrelated markets. I’m confused with the leverage and margin to make this happen. I want to be able to manual calculate it first then use apps for quicker calculations going forward.
Can I manipulate the leverage ratio to drop the required margin on a position without increasing the number of units traded and overall risk? My goal is to have 4% total risk per trading position. I would like to reduce the required margin enough so that I can have multiple uncorrelated trades going on at the same time with a small account size, without increasing the risk per position (keeping it at a set 4%). Is that possible? Or I simply need a larger account?
If I trade 8 micro lots, can I adjust my leverage to reduce my margin without increasing my risk??
What apps / calculators do you recommend that would help with these calculations going forward?
Thanks for taking the time to read this, and any input is greatly appreciated!
You haven’t indicated where your broker is domiciled, or what leverage is associated with your account. These things matter to the questions you have asked.
If you trade through a U.S. broker, then you’re stuck with 50:1 leverage (max) on major pairs, and 20:1 leverage (max) on exotic pairs. Those maximum leverage levels can be lowered (based on market conditions) by the regulator (CFTC), or by your broker. But, those leverage levels can never be raised – they are limited by law in the U.S.
50:1 maximum allowable leverage corresponds to 2% required initial margin on each position.
20:1 maximum allowable leverage corresponds to 5% required initial margin on each position.
To answer one of your questions, if you are in the U.S., you don’t have the option of raising the maximum allowable leverage associated with your account. And, therefore, you can’t lower the margin required to open positions.
Regarding multiple positions (whether correlated, or not), the required initial margin applies to each position.
Here’s an example, in which we shall assume (for convenience) that maximum allowable leverage is 50:1, and required initial margin is 2%:
Let’s say you open the following positions:
3 micro-lots of EUR/USD at 1.2346 – notional value = $3,703.80 (3 x $1000 x 1.2346)
2 micro-lots of GBP/USD at 1.4146 – notional value = $2,829.20 (2 x $1000 x 1.4146)
2 micro-lots of USD/JPY at 105.93 – notional value = $2,000 (2 x $1000)
1 micro-lot of USD/CAD at 1.2899 – notional value = $2,000 (2 x $1000)
You now have 4 positions (with a total of 8 mini-lots of various pairs) with a total notional value of $10,533
The initial margin required to open these positions is $210.66 (assuming 2% margin applies to each pair). You can’t avoid this requirement, and you can’t reduce it.
If you were to open $10,533 worth of positions in exotic pairs, to which 5% initial margin applies, then $526.65 ($10,533 x 0.05) would have to be available in your account for intial margin, in order to open these trades.
After you open these positions, the margin required to hold them – commonly referred to as maintenance margin – may be lower than the initial required margin calculated above. Check your broker’s Terms and Conditions (or User’s Manual) to find out exactly how maintenance margin is calculated. It varies from broker to broker.
Regarding risk
You seem to be confusing leverage and risk. They are totally different things.
The risk on an individual position refers to how much you will lose if your stop-loss is hit, closing your position. Total risk on multiple open positions refers to how much you will lose if all of your open positions are stopped out. Risk can be stated in terms of dollars, or in terms of percentage of account.
The risk on an individual trade depends on (1) position size, (2) pip-value, and (3) stop-loss.
Risk does not depend on leverage or margin.
Total risk (on multiple positions) is the sum of all the individual risks to which you are exposed at any given time.
The only relationship between margin and risk is this:
When positions are entered, margin is temporarily set aside (so to speak), and is not available to cover risk in those positions. In the example above, if you were to open those 4 positions in a $5,000 account, the $210.66 initial margin would be set aside (temporarily), leaving $4,789.34 to cover losses (if they happen to occur) in your open positions.
If a lower maintenance margin kicks in, right after your positions are opened, then your account would hold an amount of uncommitted funds larger than $4,789.34, which would be available to cover losses.
When a position is closed, the maintenance margin associated with that position is released back to your account, and becomes available to you for any purpose (for opening additional positions, for covering losses in other open positions, or for withdrawal).
Thank you for the great information it is very much appreciated!
After reviewing what you said, and applying it, I can in fact hold multiple positions with a small account and still keep my risk per position to a small amount (say 4% each), while having enough marginable room for the overall positions to co-exist at the same time. Of course subject to each individual brokers T&C for maintenance.
