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Regarding broker leverage - quick question just need clarification

  • #1
  • First Post: Dec 14, 2007 2:26pm Dec 14, 2007 2:26pm
Now that my focus has shifted to MM from tech and fundamental analysis, I just want to clarify something:

Broker leverage determines the margin used, where as true leverage is based upon your stop.

Example:

Account size: $10,000
Risk: 2% = 200$
Stop = 50 pips
Contract size = micro (1,000)
Lots to use = Risk / (Stop * micro pip size) = 200 / (50 * 0.1) = 40 micro lots
40 micro lots = $4.00 / pip which is 0.4 standard or 4 mini
True leverage = Contracts bought / Account Size.... 40,000 / 10,000 = 4 thus 1:4, or 0.4 standard lots

Now.......broker leverage is decided upon when you set the credentials for your account so:

1:1: Can't do it, you need $40,000 for margin
1:10: Need $4,000 for margin
1:50: Need $800 for margin

Esentially then, you want high available leverage on your account since you've already set the risk value (thus your TRUE leverage), so the margin size is smaller therefore allowing you to set more trades (instead of settign 1:1 and then only being able to trade 10 micro lots because your entire account is being margin'd even though you will never use that ammount because of your stop...)
  • #2
  • Dec 14, 2007 4:29pm Dec 14, 2007 4:29pm
I got lost in the bottom explanation, but esentialy the numbers are right. You want the leverage to place more trades or to give room to breath to your current open positions.

If you had $10,000 account with 1:1 leverage, you couldn't place a position of 10 micros because you wouldn't have free margin available that supported the floating loss (spread + negative motement), so you could maybe place 9 micros($0.90 per pip), and then the account have now $1000 of margin available to support a negative movement up to 1111 pips of that position.
Ado Whether you believe you can do a thing or not, you are right.
  • #3
  • Dec 14, 2007 4:34pm Dec 14, 2007 4:34pm
Quoting Ado
I got lost in the bottom explanation, but esentialy the numbers are right. You want the leverage to place more trades or to give room to breath to your current open positions.

If you had $10,000 account with 1:1 leverage, you couldn't place a position of 10 micros because you wouldn't have free margin available that supported the floating loss (spread + negative motement), so you could maybe place 9 micros($0.90 per pip), and then the account have now $1000 of margin available to support a negative movement up to 1111 pips of that position.
Right so esentially I wnat the highest leverage available, so the margin requirements are really low...which doesn't effect my true leverage whatsoever because I've already decided that with my predetermined stop. Is that correct?

On edit: Less margin req = more availability to set more trades. True leverage isn't changed my margin requirements, cause I've already decided how much I'm willing to loose with the stop. So it doesn't make a diff whatsoever to my actual trades, just decides how many trades I can make based on available margin. So basically...higher broker leverage is better in this case.
  • #4
  • Dec 14, 2007 4:39pm Dec 14, 2007 4:39pm
Quoting renegade7
Right so esentially I wnat the highest leverage available, so the margin requirements are really low...which doesn't effect my true leverage whatsoever because I've already decided that with my predetermined stop. Is that correct?
You don't really need a huge leverage, since you have decided your risk per trade, so, if you have 50:1 or 500:1 is the same, you will place position risking 2% of wallet, and I don't think you are considering a floating loss of more than some hundreds of pips. Maybe a high leverage would be useful if you're planing to place several positions at the same time, anyway, 50:1 or 100:1 is enough for most of traders with correct MM.
Ado Whether you believe you can do a thing or not, you are right.
  • #5
  • Dec 14, 2007 4:43pm Dec 14, 2007 4:43pm
Quoting Ado
You don't really need a huge leverage, since you have decided your risk per trade, so, if you have 50:1 or 500:1 is the same, you will place position risking 2% of wallet, and I don't think you are considering a floating loss of more than some hundreds of pips. Maybe a high leverage would be useful if you're planing to place several positions at the same time, anyway, 50:1 or 100:1 is enough for most of traders with correct MM.
Right, several positions is exactly the reason. Since you've already decided your true leverage, it doesn't matter what the broker leverage is set to really sicne 1:1 or 1:100 from the broker will have the same % changes...due to the fact that you've already decided where to exit if it's a loss. So what I'm saying is that really, you want to have the highest broker leverage possible that way you can set many more trades...and it won't make a diff to your MM cause you've already decided your stop and how much you're risking.

Higher broker leverage = more trades possible (assuming true leverage, lots, stops, etc are all predetermined)

Just want to make sure this is all correct...
  • #6
  • Dec 14, 2007 8:45pm Dec 14, 2007 8:45pm
Bump...
  • #7
  • Dec 15, 2007 8:53am Dec 15, 2007 8:53am
Right, just consider you need to have enough margin available to cover all the possible floating loss of your open positions and avoid being margin called.

There are some opinions regarding that a good MM also includes not opening too many positions at the same time (more than a % of margin available or possible loss at the same time, I don't really remember, but you might find someting if making a search in those topics) , but I guess that's depending your strategy, so, better make calculations and trade in demo to get your own results instead of forcing a square figure enter in the oval hole.
Ado Whether you believe you can do a thing or not, you are right.
  • #8
  • Dec 15, 2007 9:54am Dec 15, 2007 9:54am
Quoting Ado
Right, just consider you need to have enough margin available to cover all the possible floating loss of your open positions and avoid being margin called.

There are some opinions regarding that a good MM also includes not opening too many positions at the same time (more than a % of margin available or possible loss at the same time, I don't really remember, but you might find someting if making a search in those topics) , but I guess that's depending your strategy, so, better make calculations and trade in demo to get your own results instead of forcing a square figure enter in the oval hole.

Yes. A good MM plan will consider total risk at any given time. Generally,8 or 10% is reasonable provided you're not trading strongly correlated pairs and you have a good win/loss ratio..
For example, assuming you're risking 2% each trade, you would not want to be long Eur/Usd, Gbp/Usd, and short Jpy/Usd all at the same time. You would have too much exposure to the Usd.
As Ado says, ultimately you need to test your strategy thoroughly enough to figure out what your win/loss rate is. Only then can you determine what your total exposure should be limited to.
  • #9
  • Last Post: Dec 15, 2007 11:47am Dec 15, 2007 11:47am
Quoting billflet
Yes. A good MM plan will consider total risk at any given time. Generally,8 or 10% is reasonable provided you're not trading strongly correlated pairs and you have a good win/loss ratio..
For example, assuming you're risking 2% each trade, you would not want to be long Eur/Usd, Gbp/Usd, and short Jpy/Usd all at the same time. You would have too much exposure to the Usd.
As Ado says, ultimately you need to test your strategy thoroughly enough to figure out what your win/loss rate is. Only then can you determine what your total exposure should be limited to.
Right that makes sense. Of course it's a double edged sword like leverage as well, if your sure of your strategy (which I am not at this point), then you can use correlation to squeeze more pips out. EURUSD long against USDCHF short, etc.

Thanks both of you...makes sense now!!!
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