# Understanding Leverage and Risk?

Hi there just had a newbie question. I think I have a pretty good handle on the concepts of Leverage, and lot size and how it all works.

However in this whole scheme of things I am having trouble figuring out what the disadvantage of using more leverage is. I am always coming across warnings that higher leverage = higher risk but I’m not seeing it.

Unless I am understanding this completely wrong, the lot size determines how much your going to gain or lose dollar wise for every increase or drop in pip, correct?

Eg. 0.1 Lot you will have approx \$1(U.S.) increase or loss per pip for most currencies. As far as my understanding goes (which is likely wrong lol) all leverage does is determine how much margin will be used to place your trade. So whether I am using 100:1 or 200:1 leverage my profit or loss will be approx \$1 per pip for a 0.1 lot size trade, the only difference is my used margin will be half the size for the 200:1 leverage setting.

Is this correct? If so why would I not use 200:1 leverage, and help to avoid a margin call when involved in multiple trades?

Any help would be great, thanks.

Serge

When you start winning would you not be tempted to up your risk?

Yep you are correct higher leverage protects your account balance,
but most newbies have no concept of risk.

Also once it is real money, your real money instead of play money,
people make the strangest calls.

As long as you calculate your lot size to match your % risk of bankroll it doesnt really matter what your leverage is.

400:1 with \$1k to start

each pip is .10

my stop-loss on all trades is 50

I want to risk only 2% per trade.

\$1,000 * .02 = \$20

\$20 / 50 pips = .40

.40 / pip size = 4

So I can risk 4 micro lots per trade since at the most with a 50 pip stop loss I would lose is \$20

Only issue I see with leverage is when people overextend themselves, but that can happen with any leverage really.

Thanks for the help. I have been fooling around with forex demo accounts off and on for about 3 years but am thinking about trying out MB Trading with thier MT4 platform once it is released (expected very soon). I like the fact that their spreads are very low (1-2 pips) and their commission fees seem very reasonable. Seems like it works out to much less then the extra 2 or 3 pips charged by other brokers.

Have any of you had any experience with this broker?

Thanks

400:1 with \$1k to start

each pip is .10

my stop-loss on all trades is 50

I want to risk only 2% per trade.

\$1,000 * .02 = \$20

\$20 / 50 pips = .40

.40 / pip size = 4

So I can risk 4 micro lots per trade since at the most with a 50 pip stop loss I would lose is \$20

Yep that’s the calculation but under stress when the juices are flowing
most newbie traders will throw that calculation out of the window.

That is when the problems start. (Especially if they win the 1st time they try it.)