Further to this GCI ‘story’:
It’s been ‘bugging’ me this leverage ‘thing’.
I have not been able to make sense of the fact that by DECREASING the leverage all you are really doing is INCREASING the amount of margin required to open a position. Right up until today I was under the impression that by DECREASING the leverage you were protecting yourself in some way by REDUCING the value of a single tick / point / pip movement and that INCREASING the leverage was a ‘bad thing’. What I can’t ‘fathom’ is if you are staying within your (Wilder’s) money management rules then it WOULD APPEAR that INCREASING the leverage makes it EASIER to ‘stick’ to those rules. Let me explain:
(All the examples below refer to GCI accounts):
[U]On the default 200:1 leveraged accounts:[/U]
EUR/USD - 1 single mini lot - [B]$50[/B] margin cost.
Value per single pip movement - [B]$1[/B].
So let’s say that the starting capital in this account is $500 then this means that in the above case you are using 10% of your capital on a single lot (which is within Wilder’s rules) and you are margining 10% of your total capital (which is also within Wilder’s rules).
NOW: as it has been explained to me by GCI Admin:
[U]INCREASING the leverage to 400:1:[/U]
EUR/USD - 1 single mini lot - [B]$25[/B] margin cost.
Value per single pip movement - [B]$1[/B].
So let’s say that the starting capital in this account is $500 then this means that in the above case you are using 5% of your capital on a single lot (which is within Wilder’s rules) and you are margining 5% of your total capital (which is also within Wilder’s rules).
[U]DECREASING the leverage to 100:1:[/U]
EUR/USD - 1 single mini lot - [B]$100[/B] margin cost.
Value per single pip movement - [B]$1[/B].
So let’s say that the starting capital in this account is $500 then this means that in the above case you are using 20% of your capital on a single lot (which is now AGAINST Wilder’s rules) and you are margining 20% of your total capital (which is still within Wilder’s rules).
[U]DECREASING the leverage to 50:1:[/U]
EUR/USD - 1 single mini lot - [B]$200[/B] margin cost.
Value per single pip movement - [B]$1[/B].
So let’s say that the starting capital in this account is $500 then this means that in the above case you are using 40% of your capital on a single lot (which is ALSO against Wilder’s rules) and you are margining 40% of your total capital (which is NOW against Wilder’s rules).
Can you see the difference and what I’m trying to say???
OK: it’s of no consequence WHOSE money management rules you are following (I’m just using Wilder’s in the examples because I use a [B]conservative[/B] derivative of his rules) it would appear that all a higher leverage setting is going to do is ‘screw’ you IF you don’t stick to and within a decent set of money management rules BUT it does NOT change the tick / point / pip values at all which is NOT what I’ve been led to believe after all this time UNLESS I am STILL not understanding this and GCI is confusing me!!!
On the other hand: remember that a single lot of the Dow at Deltastock costs you $632.95 of margin per lot (50% of the Dow’s current point value) because at Delta you trade the indices on 5% margin BUT the tick / point value is $1. At GCI (with the ‘default’ 200:1 leverage) a single mini lot of the Dow Futures costs you $50 of margin per lot and the tick / point value IS STILL $1 because at GCI you trade the indices on 0.5% margin which is roughly equal to 200:1 leverage. If the leverage is INCREASED at GCI to 400:1 then the same single mini lot of the Dow Futures would cost you $25 per mini lot and the tick / point value IS STILL $1 so where is the 400:1 MORE RISKY than the 200:1 or 100:1 or 50:1??? Based on MY understanding of the above it would seem that the LOWER the leverage the more risk involved i.e. at GCI with with 50:1 leverage you’d be ‘laying out’ $200 to buy a single lot of the Dow Futures to make $1 per tick / point movement but at 400:1 you’re only ‘laying out’ $25 to make the same $1 per tick / point movement and at Delta you’re currently ‘laying out’ well over $600 to make the same $1 per tick / point movement. You tell ME which looks ‘riskier’.
From what I can see from this little ‘excercise’ the only reason that very high leverage COULD be a ‘bad thing’ is IF YOU cannot CONTROL YOURSELF and stick to a good set of money mangement rules i.e. lower leverage DOES NOT equate to a different or lower tick / point / pip value so if you’re trading Soybeans for example it does not matter WHAT your leverage setting is if it goes limit down your would STILL make / lose the same amount regardless of how much margin you’d ‘layed out’ for the lot.
Unless my understanding of this WHOLE thing is wrong then AGAIN I’d say that THE ONLY REASON that ‘leverage is a killer’ is because a person MAY tend to overtrade the account because they now have more margin available to them to trade on a given amount of capital BUT if you’re using a good set of money management rules then I don’t see the difference UNLESS as I say I’ve had this wrong all this time and GCI is ‘screwing with my brain’.
I have asked GCI to INCREASE the leverage on my accounts to 400:1 to see what happens i.e. to see what the difference is going to be because I’m NOT getting this!!!
I’m also going to ask John Foreman (‘rhodytrader’) to either confirm the above or to RE-EXPLAIN leverage and the pitfalls of having higher leverage.
Anyone else feel free to ‘chime in’!!!
