 # Need help with understanding leverage

Hello guys,

I am having difficult time understanding the effect of leverage. Let me put up a scenario that puzzles me:

I have 2 trading accounts, one with leverage 1:200 and the other is 1:1000. Both accounts have 100 USD
I opened 1 position (buy/sell) on says USDCAD with 0.01 lot size for both of the account.
In the event that the trades went against me, what is the maximum number of pips can they withstand until they get margin call?

My understanding:
Pip value for 0.01 lot size is 0.1 USD. So I simply divide 100 USD/pip value = 100/0.1 = 1000 pips. So both accounts (1:200 and 1:1000) can withstand 1000 pips drop until they both get margin call?

I feel like something is off. My feeling is that 1:200 account should get margin call first.

I appreciate if anyone can shed some light to this newbie question. Thanks in advance.

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I also want to know the details.

I think less leverage should be used. The margin is in the discipline. 1:50 Leverage should be used.

I’m going to throw a spanner in the works -

I consider a load of mystique and BS surrounds leverage, Americas can’t even pronounce it !
Being in the UK I only spread bet which is exactly the same trading by another name.
Margin is basically the deposit required to trade thereby giving the Broker security collateral. The regulators will say that this protects the trader, which of course it does but this is all very notional.
Higher leverage just means that the broker allows you to require less collateral.

Thanks for all the comments. I kinda know what leverage is. I wish to know the calculation to get the max pips the accounts can withstand before you get margin call. Then I will apply the same calculation to account with different leverage to see the max pip is the same as well.

ok, let’s do some calculations
assumptions
account 1 capital 100usd leverage 1: 200
account 2 capital \$ 100 leverage 1: 1000
The broker has set the percentage value of the margin making it possible to conclude the transaction.
pip value for micro 0.0001 / 1.23000 = 0.08130

The margin required for account 1 is \$ 5 for account 2, \$ 0.1. Therefore, the maximum values in pips (excluding spread, swap and margin call level which are dependent on broker settings) that both accounts may lose is for an account 1, 100 - \$ 5 = \$ 95: \$ 0.08 = 1187.5 for account 2, 100 - 0.1 = 99.9: 0.08 = 1249.7
Regards Greg

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Thank you very much for your reply. Now I understand how it works.

I believe the margin required for account 2 is \$1 right?
The max pips = 100 - 1 = \$99. \$99/0.0813 = 1217 pips.

In this example, it seems higher leverage is better because it can withstand higher values in pips when things are against us.

Another interesting observation:
Max pip for account 1 = \$100 - \$5 = \$95. \$95/0.0813 = 1169 pips
Max pip for account 2 = \$100 - \$1 = \$99. \$99/0.0813 = 1217 pips
The different in pips = 1217 - 1169 = 48 pips

If you change the lot size or the account capital to other value, you will always get 48 pips difference.
This means that account 2 can always last 48 pips more than account 1 (given they have the same lot size and account capital).

There is one cent

0.01 lot = \$1000
Leverage for account 1 is 1:200
So the required margin = \$1000/200 = \$5
Leverage for account 2 is 1:1000
So the required margin = \$1000/1000 = \$1

Please correct me if I am wrong Leverage is calculating from nominal size, but results are correct, The most important thing is max drawdown in backtest.

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Thank you sir! Been a great help! @LiamMillen @ I agree with you. I also like to trade on a lower leverage. It is because if the trade is unsuccessful with a higher leverage, the loss would hurt more.