Reasonable leverage

Give deeper thought to what you're saying here. You've compared using as corollary to a more traditional business taking on a line of credit. Then you indicate that someone who takes on that line of credit should actually use all of it. I don't know how much of the available credit limit one "should" use in order to not be considered "a bit crazy" but let's just say that it's somehow agreeded in general circles that it's 50%.

I think you miss-understood my example. I never said that someone that one that takes a line of credit should use it all.. I implied the contrary. And I placed it in relations to someone income.


Example: if you have a positive expectancy system that calls for the use of 200:1 leverage and you can only get a broker that has 100:1...then if you cut the positions sizing down by 1/2 the system will still make money...but it won't take just a 50% hit....it will take a much LARGER hit than 50% because of the compounding effect (assuming you increase position size as the account balance grows). It gets a lot worse if the system calls for a 200:1 leverage and you can only get 50:1. A LOT worse.

Other then some basket trading, Arbitrage or some grid trading, it is hard to imagine any good and sensible strategy that would need such big availability of credit of more then 200 to 1 . But yes.. 50:1 is way to little for USA traders and forbids the use of some good systems.

Again...fear of leverage is irrational. As long as your system is profitable you should use whatever leverage the system calls for.

You are correct. Should be no fear to have the most possible available.
But the use should be wisely.

J.

You can actually use high leverage and still trade with low risk. The way to do it is to choose smaller lot sizes.

For example, if you have a leverage of 1:100 and trade 1 standard lot, your gain/loss per pip is $10. If you have a leverage of 1:400, you can still trade 1 standard lot and make your gain/loss per pip $10.

The only difference is, it will affect your margin call % and stop-out %. And the person with the higher leverage will have an advantage there.

In the first case with the 1:100 leverage, the required margin is roughly $1000. In the second case with the 1:400 leverage, the required margin is roughly $250. Now, the formula for the margin call % is (equity/required margin). Because the trader with higher leverage has lower required margin, his margin call % would be higher, and he will have a less chance of receiving a margin call from the broker.

Terminology can be confusing at time.
When you mention "use" high leverage, I think of the amount of purchase we make and only in relation to my deposit.

So, for me , "using" high leverage will always carry more risk.
For example... If I was granted 1:100 or 1:400 from a Broker, and I do not open a trade... I am NOT "using" any leverage.

Then, if I open a trade, the degree of high or low leverage I "use", will always depends in the amount of my deposit.

If my deposit is $1000, and if I buy $1000 worth of currency... I leverage my account 1. If I buy 2000, I leverage my account 2... if I buy 50 000 I leverage my account 50 ...etc. This is totally independent of the total granted by the Broker. The Brokers just set the maximum we can buy according to "our" deposit... if it is 1:100 it means that I can buy 100 times my deposit.

So... if I buy 50 000 worth of currency, and my deposit is $1000, that is 50 times my deposit... that is very high leverage and the risk for your account is Very high.

But if my deposit is $50 000 and I buy $50 000 worth of currency, then that is 1 time my deposit... and that is low leverage... little risk to my account.

In your example... if you buy 1 lot ($100 000 worth of currency) and your deposit is $2000... that is a very high leverage (50) and Very high Risk

If your account deposit is $ 10 000, still high in my opinion (10) , but not as bad as 50.

J.

Risking no more then 2% of your capital in an specific trades is very good.
But that has nothing to do with the leverage you "use".
You can risk 2% of your account "using" a high leverage or a low leverage.

J.

This is only semi-true. It depends on your strategy. Specifically, it depends on what your stop loss is.

For example, if you had a $1000 account and you wanted use a 5-pip stoploss on the EUR/USD pair and "press" your 2% risk ($20) into that 5-pips....well, you wouldn't be able to do it with 50:1 leverage. You'd have to take on a 0.40 lot position size in order to risk $20 across 5-pips. This means that you'd need $1035 worth of margin available to work that trade (with 50:1 leverage) and since you only have $1000 on balance, you'd get a rejection when you tried to take that trade.

The point is that you cannot always risk 2% of your account using lower leverage. The maths workout to prevent you from being able to take that trade.

If you had 400:1 leverage though (like through Pepperstone), the same trade would only require $130 worth of margin. So you WOULD be able to take that trade.

Notice how with either the lower or higher leverage, the loss once the stop was hit would be $20 or 2% in both instances...the only problem is that in the first scenario you would be prevented from working such a system....but in the second you would have a green light to take the trade.

Well this is just not true. The maximum number of losses can be anything you like, it can be 100. Given a fixed number of trades, you can estimate statistically, how many sequential losses you are likely to expect, but there can still be more losses, many more. And as you point out, there are squences followed by a win, followed by another long sequence.

I use 12:1 leverage. I don't see why anyone would ever need 30:1 leverage, though some traders would rather keep the minimum possible funds with broker, for safety, and therefore leverages of 20:1 etc are quite common.

I recently explained why people need access to higher leverage, but I'll do so again.

My own system trades on intraday M5 and M15 charts. It utilizes a S/L anywhere from 6 pips to 12 pips. For our example, we'll use 10 pips to make the numbers easy.

Here's two key points to keep in mind. #1) The system requires that I take EVERY signal, and #2) The money management plan calls for position sizing anywhere from 2.5% to 5.0% on any given trade.

Things only get controversial when the position size is at its max, so let's see what happens when my system requires me to take a 5% trade on the EUR/USD at various leverages. Let's say I have a $10,000 account.

With $10,000 in the kitty and 50:1 leverage, here's what happens. In order to "squeeze" 5% of that ($500) into a 10-pip stop loss, I would have to use a position size of 5.00 Full Lots.

At 50:1 leverage, that means I would need to have $12,975 worth of margin available. I don't have that much margin available though....I only have $10,000 in the account. So when the signal comes and I click the "buy" button, I get rejected by the broker because it exceeding the margin requirements.

Bottom line? It is impossible to trade this system as designed with 50:1 leverage.

With 100:1 leverage, though, the margin requirement gets cut in half. So I only need $6486 in margin and since I have a $10,000 account, I'm able to work this system.

It should start to become clear why someone would need greater leverage than 30:1.

But let's make it even trickier.

I trade this system on 3 pairs simultaneously. The system requires me to take every signal if I'm going to trade it as designed. So what happens if I get three signals at the exact same time when the money management calls for me to take a 5% position on each of them? How much leverage would I need available?

Well, bottom line is that I'd need to be able to risk $1,500 ($500 x 3 pairs) across 10 pips collectively. What type of margin would I need at various leverages in order to be able to work this system properly? Let's list them:

@10:1 - need $194,604

@30:1 - need $64,875

@50:1 - need $38,922

@100:1 - need $19,460

@200:1 - need $9730

@300: - need $6486

So...if I was to work this system on 3 pairs as designed with no tweaks, I would need access to 200:1 leverage and 300:1 if I wanted some wiggle room. Obviously, it would be a rare occasion that all three pairs would be in play right when the money management system calls for a full 5% commitment from each pair, but in planning ahead one needs to know what one has to do in the most extreme of circumstances.

Well anyone risking 5% on a 6-10 pip stop is naive. It's not unheard of, for price to gap more than 100 pips. It's unlikely, day to day, but over a career you can expect it to happen. If there is a central bank intervention, you might be kissing your entire account goodbye. So that is simply silly. And even if it doesn't gap, it's still silly, since at 5% a trade, risk of ruin becomes very feasible.

As for your point about several positions being on at once, then yes, that's at least a sensible reason to use more leverage. On a single position though, it is my opinion that using more than 30:1 leverage is completely unnecessary, and most likely detrimental to your success and your account. Ideally aim for less than 20:1, and professionals at banks are not going to use much more than 5:1 leverage, if that.

What I said is "true" an "all the time" .
And yes,,, the "risk" on a percentage of our accounts depends "only" on our stop loss calculation.

What I said was that the risk we take or want to take in each trade has nothing to do with the leverage we use. It does not.

That is true all the time ..... now, the type of strategies we can operate having A high or low leverage provided by the Brokers is a different history.

J.

1:100

The risk we WANT to take yes, but not the risk we take. The risk we actually take DOES have a lot to do with leverage. $10,000 account

A) Someone risking 5% on a 10 pip stop
B) Someone risking 5% on a 200 pip stop

Risk seems the same, but it's not. Slippage on a stop order, say 2 pips, for case A, you've now lost 6%, case B, you've lost just slightly over 5%

Gapping of the market of 100 pips, over the weekend, during news, or an intervention, case A, you've lost 50% of your account, case B you've lost 7.5%. Don't delude yourself.

I always risk 5% of the account as a stop loss but when you select high leverage you reach to 5% faster, 1:10 is highest leverage for me and I was satisfied.