Hello, just curious about a leverage situation and why it is so dangerous.
When you use leverage, it gives you the opportunity to trade more money, with just a small amount of money. This is so that you can take part in the minute changes in the currency pair.
Even in a high leveraged position, you should be able to manage your loss with just a stop loss. I understand that slippage can occur during times of high market volatility and times of irregular market conditions.
So I guess my question is this: On a 1:1 leveraged position, you can never lose more that 100% of your account. With that being said, if you have a high leveraged position, you are now subject to the automated system that brokers have that automatically liquidate your position which means you can lose your entire account and then some. So, if you have a 1:50 leveraged position and you lose 1000 USD, you now owe the broker 1000 usd on a 1:50 ratio meaning 50,000 usd? Am I correct in this thinking?
If I am, is that why high leverage is only recommended in short term strategies such as scalping?
This leads me to my next question(sorry lol). If the above said is true, What conditions can cause the broker’s automation system to liquidate your position?
So simply put, is the above true? or is the risk that is associated with leverage due to the fact that even though you can make money faster, you can also lose it faster as well?
Sorry if this seems a little complicated, I just want to understand all of the risks.
Changing your leverage you change the speed of getting profit (and losing deposit). Scalping is the most suitable strategy for high-leverage traders, because guessing trend for 1-5 min, they make considerable profit even from that short period.
If you lose $1,000 USD on a 50:1 leveraged account, you have lost $1,000 regardless of the leverage. Leverage only effects the notional size of the trade in which you are placing, and thus the $/pip change as price moves. For example, it will require a larger loss in terms of pips to lose the same $1,000 USD using 1:1 leverage than it would when using 50:1 leverage - actually 50 times the pips, hence 50:1 = “50 x 1:1”.
As ever with leverage, be careful to understand the difference between “Offered Leverage, or Maximum Leverage on Offer” and “Actual Leverage Used”. Just because a broker offers 100:1 Leverage, you can still place a trade that uses 1:1 leverage, however the “Actual Leverage Used” can never exceed the “Maximum Leverage on Offer”. Taking high leveraged accounts from your broker is not always a bad thing though, as the higher the maximum offered leverage, the lower the required margin that your broker will put to one side for all open trades. As long as you can control your own position sizing take as much leverage as you can.
For example, my own account has a maximum offered leverage of 50:1, but the maximum leverage I happen to use which ties in with my risk management is 12:1. I could have picked an account with over 100:1 leverage, but a reduced leverage helps to eliminate mistakes or errors when entering position sizes, if you enter 1 lot rather than 0.1 lots with a $1,000 balance on GBP/USD for example, only the 0.1 lot trade will be executed.
Lets consider a pair where USD is the cross, hence XXX/USD for simplicity.
0.50 Lots is equal to 50,000 units, or a notional position of $50,000 USD.
Your account size is $1,000 USD
$50,000 USD / $1,000 USD = 50. So yes, you are correct. You need a minimum of 50:1 Leverage to place this trade.
You now have a 0.50 lot trade open, which is equal to $5.00 per pip of movement.
Your Balance of $1,000 / $5.00 = 200 pips before balance reaches $0.00
Note, you need to consider margin. A proportion of your account balance your broker sets to one side while your trade is running. They do this to stop you losing more than your deposit. Any decent broker will never let you owe them money exceeding your account balance - only in extreme circumstances of fast moving markets with extremely low liquidity.
Thank you for bringing this out. Scalpers are the ones who enjoy high leverages. If you want to scalp the market, I suggest that you find a broker that offers very high leverage for you. Scalpers don’t lose much when they lose. The high leverage will increase your pip value. I sometimes grab about $10 for each pip that I gain.