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 itâs 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?
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. Thatâs 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 traderâs 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!
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.
From what Iâve seen in America 1:20 and 1:50
Not my cup of tea, especially when I know other countries have 1:200 or 1:500 max.
I personally love 1:1000 (crazy leverage, too risky)
Leverage allows me to flip an account quickly by scalping or prove by swing trading on h4 that you can build something small if you have the patience.
Iâm going to switch to 1:200 leverage next month.
All things finance confuse the hell out of me. Itâs the chart reading as an exercise that has drawn me in, combined, obviously, with the prospect of (someday) quitting my day job.
That said, I donât get how one limits exposure of oneâs bank balance without going to super-low leverage. The above answer almost clarifies it for me, though not quite (my fault, not yours). Am I limiting exposure to my balance by setting specific stop losses whichâwhen multiplied by my leverageâwill ensure no more than, say, 2% of my account is at risk? Forgive my rank stupidity, as I was dropped on my head a lot as a child (one supposes). Thanks.
While stop losses are designed to close your trade when triggered, itâs important to note they execute as market orders. That means, they will be filled at the best available price in the market.
Depending on market conditions, that price could be exactly the level you set, close to it, or dramatically different. The following discussion thread has more details which may interest you: Can I lose more than my deposit?
Thanks. Sorry for taking so long to say âthanks.â
If you have a second do you think you might help me to see whether I even understand leverage in the first place by checking my math?
If I put $20,000 into a trade at 5:1 margin (allowing me to buy a standard lot), does a 100 pip loss mean a $500 loss at $10 per pip? Am I understanding the math correctly here? Anybody reading this should feel free to help me out here. Again, thanks.
You are partially correct, but partially incorrect.
If you deposit $20,000 in your trading account, and want to use 5:1 leverage (it is incorrect to say â5:1 marginâ), then you are correct that this would equate to approximately one standard lot (100,000 units of base currency).
We say approximately, because the notional value of one standard lot depends on the base currency of the pair you are trading:
For example, if you trade USD/JPY, USD/CHF or USD/CAD, then the base currency is the US dollar, and one standard lot would be exactly 100,000 USD. Therefore your effective leverage would be exactly 5:1 since you would be controlling $100,000 in the market with $20,000 in your account.
By contrast, if you trade EUR/USD or GBP/USD, then the base currency would be either the euro or the British pound respectively, and one standard lot would be worth 100,000 EUR or 100,000 GBP. That means your effective leverage would be slightly more than 5:1 since both euros and pounds are worth more than dollars at current EUR/USD and GBP/USD exchange rates.
First, itâs important to note the following:
If you are risking $10 per pip, then a 100 pip loss would equal $1000, not $500. (100 pips Ă $10/pip = $1000)
If you want to risk only $500 at $10 per pip, then you would need to limit your risk to 50 pips. ($500 á $10/pip = 50 pips)
Second, the value of a pip depends on the trade size and the counter currency of the pair your are trading:
For example, when trading one standard lot of EUR/USD, GBP/USD or AUD/USD, where the counter currency is the US dollar, the value of a pip is exactly $10.
By contrast, if you trade one standard lot of USD/CHF or USD/CAD, then the counter currency would be either the Swiss franc or the Canadian dollar respectively, and one pip would be worth 10 CHF or 10 CAD. (Currency pairs ending in JPY are a special case in that the value of one pip is 1000 yen, when trading one standard lot.)
For more details, you may find these earlier discussion helpful:
Okay. So if I fund an account with $20,000, using 5:1 leverage (not margin, lol) to purchase a standard lot of approximately $100,000 (for the sake of argument making all the numbers whole and even, as I think I understand now the procedure for figuring out the true and precise figures), the pip value is roughly $10 per pip.
Hence, however many pips I âcaptureâ upon exiting whatever trade I enter will be multiplied by roughly $10 while, similarly, a margin call to my accountâshould things go poorlyâwould require me to cover however many pips down I am at that moment multiplied by roughly $10, yes? (Iâm under the impression, btw, that the difference between the bid and ask prices changes these numbers slightly, but would like to gloss over that for the moment for the sake of getting a perfectly clear understanding of the mechanics of the whole procedure).
Therefore, I can go 100 pips up and collect my $1,000, or down 100 pips and be asked by the broker to fork over $1,000, and the fact that I have leveraged at 5:1 in no way affects that, correct? The role played by leverage, then, is merely in determining the value of each pip and, again, I would need to move 100 pips to the bad in order to be asked by the broker for $1,000 to cover my position. That sounds like how this works.
Please tell me I finally have some small grasp on this. I have a head like a cement block but, trust me, am a very nice person (well, my mom likes me, anyway). Again, thanks again and again and again.
Correct, but itâs important to understand, the pip value has nothing to do with the leverage you use, and has everything to do with the size of your trade. If you traded 10K instead of 100K, then you would be risking approximately $1 per pip.
It would help to clarify some terminology here to avoid confusion. Instead of âcaptureâ and âmargin callâ, think in terms of profit and loss. If youâre risking $10 per pip, and your trade makes money, then you will make $10 for every pip of profit. If your trade loses money, then you will lose $10 for every pip of loss.
Most losing trades do not result in a margin call (unless you are using poor risk management). A margin call only happens when your account balance falls below the minimum margin requirement for your open positions. For example, in the US, the minimum margin requirement to trade forex is 2% which is about $2000 to control 100K. If you have $20,000 in your account and trade 100K, then you would have to lose over $18,000 to fall below the $2000 margin requirement and receive a margin call. Since youâre risking about $10 per pip on a 100K trade, you would have to lose about 1800 pips to get a margin call. That would be like buying EUR/USD at 1.1800 and holding the trade open until it fell below 1.0000.
Correct.
No, as mentioned above, itâs the size of your trade that determines the pip value. Leverage magnifies your percentage gains and losses.
For example, if you have $100,000 and make $1000, then your percentage gain is 1% on your investment. However, if you use 5:1 leverage to open that 100K position with only $20,000 in your account, then your $1000 profit represents at 5% gain on your investment. Thatâs because $1000 is 5% of 20,000. Similarly, a $1000 loss would be a 5% drop for your $20,000.
It is absolutely a wrong idea that you canât trade without leverage. Rather a forex trader can run his own capital smoothly and earn good money if he manage his funds properly. And as a new trader if so, it is the case of using leverage then you should try to work with moderate leverage only.
Thanks. My idea was to use $20k at 5:1 leverage to purchase a standard lot of $100,000 using a limit order for protection. I would set my stop loss so as to get me out of the trade once (and if) the value of the instrument purchased dropped roughly 20-25 pips below (or rose above, if shorting) a price target determined by reasonably recent buying or selling climaxes. From what I read, many, many people have in mind much higher leverages than 5:1, making that particular ratio seem âmoderateâ to meâat least compared to the 50:1, 100:1, and 400:1 numbers I hear bandied about. Thanks.
Maybe, itâs not possible for the retail traders as like me! But I think, if you request your broker, then this service will be available (trading without trading leverage).
). Again, thanks!
