I thought I was sure how this worked, but suddenly I am not so sure anymore. I am new to forex trading and testing a demo account. Let me explain:
Lets say I open a 1:100 leveraged position. With $1000 margin I open a $100.000 position. I would have $1000 used margin and $0 free margin. I thought that I only would get liquidated if the position moved 1% against me because this would equal my total account balance and I can’t take any more downside.
However, when I read that I will get liquidation if my equity goes below my used margin, I become uncertain if I am correct.
Lets say we have the same open position (1:00 leverage, $1000 margin on a $100.000 position, $1000 used margin and $0 free margin).
If price goes down 0,01%, I would have $990 equity, but my used margin would still be $1000. In other words: my equity would be below my used margin. Does this mean my position would get partially liquidated?
I thought I would be safe using high leverage as long as I used position sizes that equals for example 1% risk of my balance. If I am daytrading and open a big position with max leverage and all my account balance as margin; would I not be safe if I use a tight stop loss that equals 1% of my account? (If I get liquidated when equity moves below used margin and margin is my entire account balance, it would be a problem.)
I am extremely greatful for anybody helping me to clear this up. Maybe I am overthinking, maybe this is a serious issue. I have been trading for a little while on demo and I have not thought of it before just now when I read the explanation that equity must be above used margin.
If you got 0 free margin you won’t be trading any more. Why are you making something so simple sound complicated…
You get a margin call at 50% to tell you your down to 50% pf your balance then when your down to 20% of your balance your trades get closed biggest first. That’s if your broker has 50% margin call And 20% stop out some may have different levels. Don’t confuse this with the margin requirement to open the trade.
You just made it sound very very complicated! I could barely even understand the question you are asking in the post.
Used margin = (Notional value of position/leverage)*exchange rate of base currency
Margin call = Equity <= used margin
My broker has an 80% margin call before closing your positions.
Example 1: $1000 account balance, leverage 1:100, pair: USDCAD, size: 1 standard lot.
Notional value of position = 100,000 units
Used margin = (100,000/100)*1 = $1000
If you try to open that, you’ll get an error message in the journal tab on mt4. My broker displays “not enough money”
Example 2: $1000 account balance, leverage 1:100, pair: USDCAD, size: 1 mini lot.
Notional value of position = 10,000 units
Used margin = (10,000/100)*1 = $100
For a mini lot - a pip is $1*USDCAD ask price(1.3395) = $1.34 per pip
Margin call Will occur after -672 pips because your equity will be $99.52 which is less than your used margin.
You can calculate position size to risk a particular % of your account before you enter a trade with BP’s position size calculator.
Thank you for a thorough response and I am sorry for the messy question. To be sure that I have understood you correctly I will add some examples and hopefully the respons to all four questions will be; “yes”.
Numero 1: It is “safe” for me (I won’t get margin called) to use high leverage as long as I make sure that my stop loss kicks in before my equity falls below the used margin?
Numero 2:
I won’t be able to open a $100.000 position with a $1000 account, because all my account balance/equity is used as margin and if the position moves only 1 pip against me my equity would be below my margin. Correct?
Numero 3:
If I open 3 positions on a $1000 account,
all with a stop loss of 1% of my account balance ($10 risk per position),
using a total margin of $965;
then I don’t have to fear being margin called. Because if all 3 stop losses gets triggered I would have an equity of $970, which is $5 above my used margin at $965. Correct?
Numero 4:
In general: if I use my entire account balance as margin, then I don`t have room for any movement against my position at all. Correct?
Struggling a bit to wrap my head around this so just gotta ask the dumb questions, I am sorry. Will test on the demo account when markets open again.
If you using £1000 @ 1:100 leverage
And wanted to open 100.000 position on Eur/Usd it would cost you £898 leaving you with £102 margin which is like 10% of your capital so you would not be able to open it.
Don’t how know you got that figure.
If you open 1 mini lot per position, the used margin would be about $100 per position. You would still be risking 1% if you have a 10pips Stop loss for each position. Which is too tight
Why not open 2 micro lots instead with 50 pips stop loss which still keeps your risk at 1% and used margin of about $20 per trade.
Please try this out on demo, it’s a very simple subject that you won’t be looking at if you keep calculating your risk per trade.
Again, your broker won’t allow you to use your entire account as margin. The position won’t be opened.
Thank you both. I think I am almost there. The thing is, I have traded crypto fairly successfull for about 1 year. No need for leverage because of the volatility. I have opened a demo account and applied the same methods successfully on some trades but now realized I had not fully understood this.
I often trade the hourly timeframe, and I often have like a 8-20 pip stop loss and a 10-40 pip profit target.
That is why I am so eager to fully understand the risks of using high leverage. Because I like to risk 1% to potentially gain 1,5 or 2%. With these small pip moves, I need to use high leverage in order to manage this.
So hypothetically, I can use a lot of my account balance as margin as long as I have good risk management (clear stop loss levels well within equity > margin levels)?
The leverage just magnifies your buying power but not you initial capital so when you open big position sizes with small capital when it goes wrong it eats your £££ quicker.
It’s finding the right balance and having some discipline that helps
@A1lenTrader , that’s a concise and clear explanation of what broker leverage does. The way I’ve learned to approach broker leverage is not that I can put on “larger” positions after calculating my position size but looking at it as a discount on equity required to get into that position.
Using USD round numbers for simplicity and no spreads (What a a great dream!! )
Say my risk mangement only allows my to buy 1 micro lot - .01 (1000)
50:1 broker leverage = $20 of margin
100:1 broker leverage = $10 of margin
1000:1 broker leverage = $1 of margin
All the above trades sill make 10 cents a pip.
While a trader can enter larger positions with broker leverage, increasing pip value on a small account, negative pips can devour equity quickly. This is why I like the approach of not buying more but spending less.
I know it seems pretty straight forward for most people but it wasn’t for me initially. Though overused and can sound trite “Sometimes less is more.”
Hope this gives some other beginners like me a different perspective on boker leverage to consider.
Great input and this just confirmed that I was correct about what I believed in my second response (even though I explained it poorly).
In a way it is only great to have huge leverage because it means that you can open more positions, if you would like to, without using all your margin. As long as you manage your risk, of course.
I always check what I will lose if my stop loss is triggered. If I make sure I lose no more than $10 bucks each trade on a loss on a $1000 account, I could really open several positions with high leverage. The leverage helps me to risk and gain appropriate amounts.
High leverage, for example 1:200 or 1:500 is really only a disadvantage when if you open bigger position sizes than you’d do otherwise, so that you risk more than 1% (if that is your rule). As long as risk is managed appropriately, you only use less margin and have more free capital to open new positions if you see any opportunites.
I started with a spread bet account at first cos it is tax free but I was just learning and was literally in and out of trades every 10-20 mins all day long, cutting losing trades at £5-10 and winning trades at £15-20. then I started moving stops up about £5 past break even and letting them run.
It was a bit exhausting but made more than I put in. Then broker had a big price glitch when I was testing on a demo 1 day and shook me up wondering if I could trust them. So I moved to pepperstone ecn which is not SB account because the spreads were alot lower but had to pay commissions which still came in at less than spread bet account also spread widening was smaller too. Just wondering @tommor why you choose spread bet instead of ecn.? And do you have swaps on spread bet ? Can’t remember if i did with LCG…
Best Regards.
I use SB because the costs aren’t significant, I don’t trade intra-day. SB is an ambush waiting to happen for day-traders. The SB firms I’ve used have been universally reliable. So maybe there’s an element of inertia, but if something is working, I don’t see great motivation to change it.
Yeah suppose it would not make much difference for longer term with wider stops etc. but still surely the cost of spread is less so you’d be getting a better deal even with commission. Since i have returned back to work i cannot trade in the day like before so I’m. Placing buy/limit orders now and checking every few days or when i can. But i must say though i do miss the faster trading style of intra-day for some reason it can be quite addictive.
Could somebody please confirm that I have understood this?
In a way it is only great to have huge leverage because it means that you can open more positions, if you would like to, without using all your margin. As long as you manage your risk, of course.
I always check what I will lose if my stop loss is triggered. If I make sure I lose no more than $10 bucks each trade on a loss on a $1000 account, I could really open several positions with high leverage. The leverage helps me to risk and gain appropriate amounts.
High leverage, for example 1:200 or 1:500 is really only a disadvantage when if you open bigger position sizes than you’d do otherwise, so that you risk more than 1% (if that is your rule). As long as risk is managed appropriately, you only use less margin and have more free capital to open new positions if you see any opportunites.
Hypothetically: It does not matter if I use 1:200 leverage if my equity is $1000 USD, my margin is $989 USD and max loss (with stop loss) is $10 USD? I won’t get margin called.
Yes you wouldn’t get margin called as your well below the threshold and within your means.
As long as you exercise proper risk management your leverage really means nothing. If you’re only risking 1% of your account whether your leverage is 50:1 or 10000:1 it doesn’t matter all you’ll lose is just 1% of your account on that trade. Higher leveraging just gives you the ability to enter/hold a position while risking a smaller margin of your account being utilized (incase you’d like to enter into more trades).
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