I have just finished the lessons in babypips.com but there are still lots of questions swimming in my head, particularly so in the area of getting started with forex micro account (Which I know I shouldn’t start if I don’t have a clear idea in it).
For the past 3 months, I have been practising on DBFX demo account and managed to get the basic experience in trading (even doubling my balance from $50000 to $100000). Yet, I believe there are much more for me to learn and explore before I get myself a real account.
To help me out, can someone please enlightened me on leverages and margins?
Some of the few questions that have been bugging me are as below:
If I were to open a micro account with the capital of $2000, do I have a choice to state the preference for my leverage? E.g. 50:1 , 100:1?
On a 10:1 leverage, I manage to double my balance from $20000 to $40000, does it mean I am earning $20000 or $2000?
Similarly, on a 10:1 leverage, if I lost $10000 from my initial $20000 account balance, does it mean I lost $1000 or $10000 (which means I have to cough out additional $8000 to pay up for my loss)?
I’m a total noob here and thus, may not be making sense in my questions above. Hopefully someone can point out to me and I will try to clarify my questions so that in the process I can deepen my understanding as well.
I’m a newbie too, but I think I can answer questions 2 & 3 lol
Your account balance is YOUR money. That has nothing to do with the leveraged amount you borrow. That $50 grand in your demo account, if that was real life, that would be your money. If you leverage that 100:1, that would be a 5 million dollar trade! Whatever profit you make on a trade is yours. Just as whatever loss you incur, that is also yours! The broker does not share in your losses, and he does not share in your profits. Your account balance is your money.
Your leverage has nothing to do with your account balance, and nothing to do with how much of your wins and losses you get to keep. If you make $1000 in profit then you made $1000 in profit, no matter if your leverage is 1:1 or 500:1.
All leverage does is allow you trade trade larger positions. Think of it as credit… A 500:1 leverage allows you to trade $500 by putting up $1 of your own money as “collateral.”
And yes, your broker will usually let you set your leverage, but there’s really no reason to do so. If you’re following proper money management then you won’t use that much leverage anyway, so it doesn’t matter what your leverage is. Your trades should be the same whether your leverage is 20:1 or 500:1.
If you’ve been overleveraging yourself on your demo account then I urge you to please stop now! If you trade that way on a live account you will eventually lose all your money. You should only be risking a small percentage of your account balance per trade (1-2%).
Thanks for the info. They really cleared my head somehow.
Just to make sure that I do understand it as you have said; if I am leveraging on 500:1, and trading at $500 with $1 capital, losing $2 will mean that I lost $1000 and vice versa?
Which option in the demo account will allow me to adjust on my leverage? Or how do I specific how much leverage I would like to trade on?
I am also thinking of getting a book on Forex trading to further understand the mechanism behind it. Is there any recommendation for beginners??
Well if you invested only $1 of your own money, at 500:1, and the currency lost half its value, then you would have lost $250 on that trade if you would have sold at that point.
As long as you have the margin in your account to cover losses, you will reap 100% of any gain if things go your way.
If you trade 1 standard lot and lose a trade for -10 pips you have lost $100. Whether you have 1:1 leverage or 500:1 leverage you still lost $100. The only thing leverage does is determine how much money you have to “put up” in used margin to make that trade.
You should figure your risk by your account size, leverage shouldn’t enter the calculation.
If you have a $1000 dollar account and you want to risk 2% of your account per trade then you need to risk $20. So if your trade needs a 10 pip stoploss then you want to trade $0.50 cents per pip, which would be 5 micro lots.
This is how you manage risk… Leverage doesn’t matter. If you risk a small percentage of your account per trade (I suggest less than 2%) then you are in no danger of overleveraging yourself and you don’t have to worry about your leverage.
I’ve been trading for years and I’m not even sure what my leverage is set at.
