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.
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
USD CAD rate 1.23000
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
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).
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
@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.
Leverage is a term that can be defined in a variety of ways. Leverage is when you borrow a portion of the money you need to invest in something. In the case of forex, money is usually borrowed from a broker. Forex trading does provide significant leverage in the sense that a trader can build up and control a large amount of money for a little initial margin need.
The most important thing is max drawdown in backtest.