And are there any traders who trade without leverage? Or this makes no sense?
Trading without leverage is almost impossible, it is the backbone of this business, as concern to me, I am using 1:500 leverage as it is good and I am surviving efficiently with this leverage, It is perfect and all the newbie’s should use the leverage for fruitful results.
Yes new traders should not highest leverage as they can feel difficulty to manage and deal with it. Leverage seems good but can be dangerous when you trade much with it. 1:50 to 1:100 leverage is best for new traders
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High trading leverage offers you to use healthy trading lot size! So, when traders lose a trade then usually they try to recover this trade so quickly by using double even more trading lots size, generally high leverage is the main weapon of over-lots size! That’s the actual disadvantage of high leverage, low leverage is always useful!
Trading without leverage feature is not impossible actually! But, on retail market leverage is very popular trading feature! By the way, I seem 1:100 is a decent trading leverage for the new traders! Novice traders should avoid high leverage, high trading leverage inspires to take high risk in trading.
@hasmunfx, James highlights an important point above.
When people talk about their leverage, they sometimes mean the leverage they are using per trade AKA their effective leverage, and they sometimes mean the maximum leverage available to them in their account. You sometimes have to figure this out from the context.
When someone says they use 10:1 leverage, they’re probably referring to their effective leverage, the amount they use per trade is 10:1. That means, the size of their open positions is 10 times the amount of money they have in their account.
When someone says they use 400:1 leverage, they’re probably referring to the maximum leverage available in their account, because it’s unlikely their open positions are 400 times the amount of money in their account.
Leverage magnifies gains and losses, so it’s important to manage your risk appropriately. Speaking of risk management, you might want to approach this question from a different angle. Instead of trying to pick the best leverage, try to choose the best trade size.
For example, many traders talk about limiting your risk per trade to 2% of your balance. This is a good place to start. Suppose you have $8,000 in your trading account. You can then risk $160 per trade. Suppose further that you identify a trade opportunity on EUR/USD and want to set your stop 40 pips away.
With $160 to risk on 40 pips, you can risk $4 per pip on this EUR/USD trade. That equates to a trade size of 40K EUR/USD or 4 mini lots. Incidentally, that’s approximately 5:1 leverage on your 8K account balance. It’s only approximate, because 40,000 euros is more than 40,000 US dollars, and the account balance in our example is USD.
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If you are new to market then you must start with a minimum leverage of market because you have no idea how it is going to help you. Once you get experience to market, you can decide what leverage suits your strategy.
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Leverage can make you profitable but on the contrary it can cause a reason for a huge loss. New Forex traders basically doesn’t know how to manage risk when market moves at random , so before using leverage they can practice demo to see the performance how leverage works.
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True, It depends on trader that how he can manage his trading work with Leverage. It is always advisable to learn about your leverage and trading work so that you can give your best from your analysis.
if you can not trade profitably with lower leverage, then for sure you can not trade profitably with higher leverage (tho you can easily take bigger risks with higher leverage)
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As you do experiments you know the effects of different leverages. I did it on demo and understand how leverage works, then I decide I should take 1:100 to 1:200 leverage not more than it. Because it can put me in more difficulty.
In my opinion 1:600 is normal leverage and we can survive in forex with this leverage efficiently, I am also using this leverage and enjoying forex, never use the small leverage as using low leverage you can not take the big decision, so be careful about leverage.
WTF. Again WTF???
Margin call
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Absolutely.
A trader must always be aware of the monetary risk associated with each trade they make, and this is a function of position size and number of pips, not leverage.
Two traders with identical position sizes and identical SL/TP have the same risk (disregarding slippage, etc) even though their leverage might be totally different. The only impact of leverage is how much initial “deposit” is locked from your account’s free equity. This initial locked margin then increases/decreases in real time as the price changes. The amount this margin subsequently changes by is only determined by the gain/loss on the position, not by one’s leverage availability.
The only impact of leverage is how large a position one can take as a multiple of one’s equity. But, of course, if one uses available high leverage ratios to the full then it creates a risk exposure far beyond what is normally considered reasonable.
In most situations, if risk exposure is contained to a reasonable percentage of equity and the pips size of the stoploss is more than the minimal 10-15 pips then the max position size fulfilling this criteria will be well within the normal leverage values and the actual max leverage becomes irrelevant.
The only situation I can think of where high leverage is necessary is for a trader who is scalping for a few pips with very tight stops and is using very large positions under intense constant monitoring. The risk exposure is this scenario is theoretically huge but in practice is dependent on the speed of the traders clicks and transmission efficiency.
Otherwise, I can only think that high leverage is useful for tiny account sizes in order to be able to even take a position worth bothering with (beyond training purposes) - but with the result that risk exposure is probably nearer 25-50% of equity rather than 1-5%.
One danger with leverage arises with brokers that sometimes reduce account leverage, for example, when there is a perceived high risk of increasing volatility, etc. The impact of significantly reducing leverage is to increase the margin locked against your open positions. If these open positions and their possible current losses are already requiring a large portion of your equity then a reduction in leverage could result in a margin call or automatic closure of all the positions.
High leverage brings high risk in business. But it is not itself dangerous. But trader need to use it sensibly. But most of the time trader take leverage facility in high volume but they forget it is nothing but borrowing money from brokers. At the end of the day they have to return the money. So, if they lose in business they have to pay high amount of money in order to cover leverage.
Moreover, the nature of leveraged trading means that any market movement will have an equally proportional effect on your deposited funds. This may work against you as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses.
While it’s true that you borrow money from your stock broker if you trade stocks with leverage, you do not borrow money from your forex or futures broker if you trade forex of futures with leverage. We explain this in greater detail in the following post: Does a real ECN broker exist?
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Raising margin requirements (reducing the leverage available to traders) is an important part of risk management that should be exercised by financially responsible brokers and regulators (and in the case of stocks and futures by exchanges) when changing market conditions point to risk of increased volatility.
After all, the margin requirements for a given currency pair even in normal market conditions are determined based on the typical volatility for that pair. That’s why exotic currency pairs have higher margin requirements (less leverage available to traders) than major currency pairs.
We discuss the rationale for raising margin requirements based on market conditions and the perils of brokers who do not respond to changing risk in greater detail in the following thread: LOW leverage is in fact dangerous
Thanks for extending the understanding here of the impact of changes in leverage. It is indeed a significant factor in risk management for all parties.
In normal risk exposure levels I guess it does not impact too greatly on a trader’s open positions, but especially traders with small balances and a lack of understanding of how leverage changes the margin requirements on their existing positions and not just on new ones, may well hold excessively large positions and be at risk of a margin call/close out.
As you say, this is a measure of prudency in the face of anticipated increased volatility and it is therefore essential that a broker also warns its traders of forthcoming changes in order that positions may be adjusted if necessary. I guess most reputable brokers do this but I have heard of incidents where traders have not been told beforehand at all!
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Trading with big amount is better and you can use the big leverage which is the backbone of this business, so I would like to prefer 1:600 leverage but you investment should be 300-400 USD for fruitful results.
It depends on your risk-management strategy