Alright, I’m trying to ‘get’ this concept of leverage. Specifically the ratios. I kinda know what it means when a broker tells me that they have a 400:1 ratio.
All I know is that the ratio is the amount that the broker is willing to lend me, but I don’t really understand what the difference in the actual trade is other than what I can afford. Like, does taking on more leverage = a higher payout if I manage to get a good trade? If my trade happens to be a loser, what happens then?
I’m reading Dr Forex article on leverage and trying to grasp the concept fully ( even though I haven’t had much time to read it since I’ve pretty much been running all over the place lately because I’m moving ). Yet it still hasn’t answered my question fully. Or maybe it has but I just didn’t get it the way it was explained…even though it seems pretty simply explained…
what it does tell me is I need to use leverage the right way. So I’d like to figure it out so I can use leverage to my advantage.
Leverage and margin go hand in hand, the higher the leverage the lower the margin required and visa versa. In forex you trade “lot” sizes which can be standard(100,000 units), mini(10,000 units) or micro(1000 units). In all cases you have to have the margin to be able to place a trade and the leverage dictates how much that will be, you can think of it as a security deposit, that is returned to you after your trade is finished. Your broker will give you 100,000 units but you have to give him 250 units (at 400:1) as a security deposit
Note I say units not dollars because it changes depending on the currency you trading. If its USD based then it would equal $.
$100,000 at 400:1 = $250
$100,000 at 200:1 = $500
$100,000 at 100:1 = $1,000
Higher or lower leverage does not mean a better or worse “payout” It shouldn’t matter what leverage you choose because your money management wil dictate was size (how many lots) you will be trading.
Anyway read though the school, then read it again…
I understand leverage…but why is it dangerous? I guess thinking back to babypips school, people make the mistake of thinking that they can buy more lots with higher leverage since higher leverage equals less money to front…but they don’t factor in that each lot multiplies their loss according to the price per pip…right? So 10 lots at $1/pip (mini lot)with a 1 pip move equals a $10 loss or gain depending if the market went positive or negative for you.
I plan on doing 1 mini lot at a time. I don’t plan on doing more than that.
I plan on putting up 1k-2k USD as margin.
Every pip is equal to $1 when we’re talking currencies that trade .0001 right?
So if I do a USD/XXX pair trade with 100:1 leverage I’ll only have to front $100 leaving me with $900 usable margin right?
This gives me a 900 pip cushion before a margin call right?
I know GFT says that once your margin goes down to 25% they give you a margin call. In that case I would be down to 1000x .25 or $250 USD before they give me a margin call right? This would translate into a cushion of 900-250 = 650 pips right?
Well most people tend to say that once your usable margin is used up, you get margin called, however your broker will most likely let you also lose some of your required margin for the trade as well.
So I would presume what GFT is saying is that @ 25% of your margin they will Margin Call you. Meaning -$900 and then 75% of your margin ($75) leaving you with $25 at the end of the day. Essentially you will not get a margin call till your account is totally blown.
Focus on your money management, proper stops and you will never have to worry about a margin call.