Leverage!! | Forex Factory

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Leverage!!

  • #1
  • First Post: Mar 18, 2007 7:30am Mar 18, 2007 7:30am
Dear All..

I have a question that does it matter if you have 20-1 leverage or 400-1 even though you would be using or maximum of 2-1 leverage.

My question is that if your tradign plan required maximum use of 2-1 leverage but you have account of 400-1, or 200-1 does it matter??

Thanks for your help...
Thanks and Regards Zamir M Iqbal
  • #2
  • Mar 18, 2007 7:37am Mar 18, 2007 7:37am
Quoting zamiriqbal
Dear All..

I have a question that does it matter if you have 20-1 leverage or 400-1 even though you would be using or maximum of 2-1 leverage.

My question is that if your tradign plan required maximum use of 2-1 leverage but you have account of 400-1, or 200-1 does it matter??

Thanks for your help...
If you use s/l in every trades, using 200-1 or 400-1 won't affect trade performance. It only affects if you rely on margin call as your s/l.
Tra-X
  • #3
  • Edited 9:59am Mar 18, 2007 9:42am | Edited 9:59am
Quoting zamiriqbal
I have a question that does it matter if you have 20-1 leverage or 400-1 even though you would be using or maximum of 2-1 leverage.
It does not matter at all. Your risk is your real leverage.
L = S/E
L - leverage
S - the sum in dollars of all your open positions
E - equity

Just have a look at the Money Management Spreadsheet in http://www.forexfactory.com/showthread.php?t=20528
Prof Herman
  • #4
  • Mar 18, 2007 10:04am Mar 18, 2007 10:04am
If you have FXSolutions, leverage does have an effect on your cost of carry (interest premiums). They give much better premiums for low leverage, and I have since moved my leverage down to 50:1 (the lowest level they offer)


andersenws
"Youth is the trustee of prosperity." - Benjamin Disraeli
  • #5
  • Mar 18, 2007 11:38am Mar 18, 2007 11:38am
Alright, someone isn't doing their homework. Brokerages offer the leverages per trade, Like 50:1, 100:1, 200:1,400:1. Risk to reward ratio of 2:1 such as going long EUR/USD at 1.3000, stop loss at 1.2990 and take profit at 1.3020. Risking 10 pips in hopes of gaining 20 pips. Risk to reward ratio of 3:1, i.e. long at EUR/USD 1.3000,SL @ 1.2990, TP @ 1.3030.
With $5000.00 with 100 pips loss on a trade at aproximately 100:1 leverage for a 1 standard lot trade (Euro 100000 is worth $1300) Your account is worth $3700, at 200:1 your loss is $2600, @ 400:1 your account is worth $200.
With 100:1 ratio, fifty lots out of $5000 is $100, trade only one of these lots at a time or less til you figure out how to use candlesticks, support and resistance, moving averages, momentum, bollinger bands and then figure out your taxes with either 998 section stuff or 1256 section stuff for American forex nuts.
If you can't even read basic stuff about the field in which want to make millions, don't expect to go longer than this year at trading.
  • #6
  • Mar 18, 2007 1:44pm Mar 18, 2007 1:44pm
I believe the original poster, when he said 2:1 leverage, was referring to the true leverage calculation, which is completely separate from the leverage the broker's are talking about.

The best way I can explain it is:
Leverage has no effect on your risk. A ten pip loss on 1 lot is the same on 400:1 leverage as it is on 100:1 leverage. However, the reason newbies should use low leverage is to be protected from their own urge to trade a bigger size than they should.


andersenws
"Youth is the trustee of prosperity." - Benjamin Disraeli
  • #7
  • Mar 19, 2007 3:45am Mar 19, 2007 3:45am
Dear Andreson...

Thanks..i got th answer i was looking for from your post...
Thanks and Regards Zamir M Iqbal
  • #8
  • Mar 19, 2007 10:00am Mar 19, 2007 10:00am
Quoting andersenws
I believe the original poster, when he said 2:1 leverage, was referring to the true leverage calculation, which is completely separate from the leverage the broker's are talking about.

The best way I can explain it is:
Leverage has no effect on your risk. A ten pip loss on 1 lot is the same on 400:1 leverage as it is on 100:1 leverage. However, the reason newbies should use low leverage is to be protected from their own urge to trade a bigger size than they should.


andersenws
Your loss is 4 times bigger with the 400:1 leverage compared to 100:1 leverage period.
  • #9
  • Mar 22, 2007 8:38pm Mar 22, 2007 8:38pm
Quoting andersenws
I believe the original poster, when he said 2:1 leverage, was referring to the true leverage calculation, which is completely separate from the leverage the broker's are talking about.

The best way I can explain it is:
Leverage has no effect on your risk. A ten pip loss on 1 lot is the same on 400:1 leverage as it is on 100:1 leverage. However, the reason newbies should use low leverage is to be protected from their own urge to trade a bigger size than they should.


andersenws

Bingo!

  • #10
  • Mar 22, 2007 9:03pm Mar 22, 2007 9:03pm
Quoting mdetlh
Your loss is 4 times bigger with the 400:1 leverage compared to 100:1 leverage period.
So if the market moves 50 pips against two traders, trader A (100:1 leverage account) will only lose 50 pips but trader B (400:1 leverage) will lose 200 pips (4 times 50), is that it?
  • #11
  • Mar 22, 2007 9:14pm Mar 22, 2007 9:14pm
Quoting FXTerminator
So if the market moves 50 pips against two traders, trader A (100:1 leverage account) will only lose 50 pips but trader B (400:1 leverage) will lose 200 pips (4 times 50), is that it?
no they'd lose 4 times more the amount of money, not the pips.
  • #12
  • Mar 22, 2007 9:38pm Mar 22, 2007 9:38pm
Quoting aicccia
no they'd lose 4 times more the amount of money, not the pips.
You are sure about that Aicccia?

So if they are both trading 1 standard 100k eur/usd lot and the market goes 50 pips against them, trader A (100:1 leverage) will lose $500 and trader B (400:1) will lose $2000?
  • #13
  • Mar 22, 2007 9:42pm Mar 22, 2007 9:42pm
Quoting FXTerminator
You are sure about that Aicccia?

So if they are both trading 1 standard 100k eur/usd lot and the market goes 50 pips against them, trader A (100:1 leverage) will lose $500 and trader B (400:1) will lose $2000?
well I don't trade lots, I trade account balance percentages. But normally if you have an account with higher leverage you use the high leverage and trade with more lots. Whats the point getting an account with higher leverage if you're not going to use the leverage to your favor?
  • #14
  • Mar 22, 2007 10:04pm Mar 22, 2007 10:04pm
Quoting aicccia
well I don't trade lots, I trade account balance percentages. But normally if you have an account with higher leverage you use the high leverage and trade with more lots. Whats the point getting an account with higher leverage if you're not going to use the leverage to your favor?
Yes I know, we both understand each other correctly but the other member and yourself need to add this to your posts: a 400:1 account will generate 4 times more losses than a 100:1 account... if and only if both accounts are trading the SAME exact percentage of trading balance AND the trading balances are equal.
  • #15
  • Edited 10:22pm Mar 22, 2007 10:07pm | Edited 10:22pm
High leverage burns under-capitalised traders -> wipe out account faster.
Lets say trader A account is $10,000, trader B $1000. Both use same leverage ratio and suffer same loss, say $500.
Trader A now has $9500, trader B $500.
If trader B continues to use high leverage, soon his account will be depleted.
But if a trader has good mm, discipline, trading system and sufficient capital, high leverage can be a good tool with proper use of course.
Forex is my business
  • #16
  • Mar 22, 2007 10:30pm Mar 22, 2007 10:30pm
Quoting incomeideas
High leverage burns under-capitalised traders -> wipe out account faster.
Incomeideas, I would like your opinion on this please:

Take two traders, trader A and trader B.

Trader A deposits $50,000 immediately in his forex account.
Trader B deposits only $100 but he has a good job and could easily send up to $50,000 to his FX account over the course of let's say 10 years.

Both traders control $10,000 worth of currency each time they open a position and both traders need $100 margin money to initiate a trade.

Now, in your opinion, is trader B really under-capitalized?

And second simple question: after 1000 trades, do you think trader B will make LESS money than Trader A if they both initiate the same exact trades with the same exact stoploss and take profits?
  • #17
  • Mar 22, 2007 10:44pm Mar 22, 2007 10:44pm
The answer to that and a little more you will find it in a great thread about MM. I highly recommend you that you read it.

http://www.forexfactory.com/showthread.php?t=3690
  • #18
  • Mar 22, 2007 10:47pm Mar 22, 2007 10:47pm
Well for discussion sake, my view as follows :

Quoting FXTerminator
Incomeideas, I would like your opinion on this please:

Take two traders, trader A and trader B.

Trader A deposits $50,000 immediately in his forex account.
Trader B deposits only $100 but he has a good job and could easily send up to $50,000 to his FX account over the course of let's say 10 years.

Both traders control $10,000 worth of currency each time they open a position and both traders need $100 margin money to initiate a trade.

Now, in your opinion, is trader B really under-capitalized?

And second simple question: after 1000 trades, do you think trader B will make LESS money than Trader A if they both initiate the same exact trades with the same exact stoploss and take profits?
- As you said, trader A has $10,000 but trader B only $100 NOW. He may have $10,000 in 10 YEARS, but NOW he only has $100. Dont you think a series of negative trades would blown him out.
Well trade B can always topup his account with another $100, another $100,....... Guess who gets margin call the most, how many times his account get blow out ?

Trading based on hypothetical method is not enough, in reality psychological impact are important too. Take note of the psychological impact on trader B, unless he is super duper confidence in his trading system, mm, discipline, I wonder does he still has the courage to continue trading despite a series of negative trading.

Just my 2 cts.
Forex is my business
  • #19
  • Edited 11:29pm Mar 22, 2007 11:07pm | Edited 11:29pm
Quoting incomeideas
Well for discussion sake, my view as follows :



- As you said, trader A has $10,000 but trader B only $100 NOW. He may have $10,000 in 10 YEARS, but NOW he only has $100. Dont you think a series of negative trades would blown him out.
"blown him out" simply means he lost another $100, not that he is totally out of the forex trading business.

Ok, let's suppose they both have a decent trading system and that the MAXIMUM drawdown is 1000 pips.

Let's imagine the worst trading scenario, they both experience an immediate 1000 pip drawdown after 50 trades. 25 trades later the built-in edge of their system has now recovered the 1000 pip loss and from that point on the equity curve starts to rise.

Same question again, in your opinion, do you think trader B (the "under-capitalized", "way too leveraged" trader) will make LESS money at the end? if so why?
  • #20
  • Mar 22, 2007 11:38pm Mar 22, 2007 11:38pm
If I want to risk 10:1 real leverage, in a 50:1 account I risk 20% of my account. In a 400:1 account I risk 4% of my account. It's all the same if you calculate real leverage...

The point being, if I lose, I lose 4% in the 400/1 account and 20% in the 50/1 account....
"The time to act is when others show signs of tire." --W.D. Gann
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