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Questions about leverage...

  • #1
  • First Post: Nov 26, 2017 11:58am Nov 26, 2017 11:58am
Sorry for the sheer ignorance of these questions but i just cant seem to get my head round leverage and how it works, I understand that its a way of 'borrowing' money so you can trade with more money than your actually capital, but...

1) Is it then possible to nearly/completely wipe my account with one bad trade or on the other extreme, make a complete killing on one good trade?
2) Do you have to use leverage? Is it needed to be profitable in the long term?

Could someone explain it please I just cant seem to get my head around it.
Thanks
  • #2
  • Nov 27, 2017 1:10am Nov 27, 2017 1:10am
Quoting oliverfxldn
Sorry for the sheer ignorance of these questions but i just cant seem to get my head round leverage and how it works, I understand that its a way of 'borrowing' money so you can trade with more money than your actually capital, but... 1) Is it then possible to nearly/completely wipe my account with one bad trade or on the other extreme, make a complete killing on one good trade? 2) Do you have to use leverage? Is it needed to be profitable in the long term? Could someone explain it please I just cant seem to get my head around it. Thanks
According to me, leverage is not a bad thing; I use this trading feature in order to my trading plan and system! Really sometimes it helps me a lot!
  • #3
  • Nov 27, 2017 2:41am Nov 27, 2017 2:41am
From book meaning of "leverage" is being able to control a lot of cash utilizing none or almost no of your own cash and acquiring the rest. When you put resources into a leveraged item, the supplier will ask you to set up an aggregate speaking to only a small amount of the aggregate estimation of your position. For instance, to control a $100,000 position, your broker will set aside $1,000 from your record. Your leverage, which is communicated in proportions, is currently 100:1.
  • #4
  • Dec 7, 2017 4:15am Dec 7, 2017 4:15am
Quoting Hugelee
From book meaning of "leverage" is being able to control a lot of cash utilizing none or almost no of your own cash and acquiring the rest. When you put resources into a leveraged item, the supplier will ask you to set up an aggregate speaking to only a small amount of the aggregate estimation of your position. For instance, to control a $100,000 position, your broker will set aside $1,000 from your record. Your leverage, which is communicated in proportions, is currently 100:1.
You are right Hugelee; you are right! By the way, which leverage do you like to use in your trading?
  • #5
  • Dec 7, 2017 7:22am Dec 7, 2017 7:22am
Quoting oliverfxldn
1) Is it then possible to nearly/completely wipe my account with one bad trade or on the other extreme, make a complete killing on one good trade?
2) Do you have to use leverage? Is it needed to be profitable in the long term? Could someone explain it please I just cant seem to get my head around it. Thanks
1. Yes
2. Grey area. The bigger account size - the less leverage you'll need. 10% a year on 1000 account - not worth the hassle. 10% a year on 1 million - very comfortable life. So the smaller account requires bigger leverage just to see reasonable return at the same time pushing you risk much higher.

My personal approach to leverage. I'm conservative trader and using ~5:1 leverage. So with 10000 account position size it would be ~0.5 lot. I would need to keep all my money with a broker. Now as conservative trader with such leverage - 10% loss is rare. At least for me
So - I keep only 2000 with broker and using 100:1 leverage. In case of black swan event I'm risking only 20% of my initial capital and rest of the money safely sitting in my bank account. Even if account size drops to 500 - i still can open position of 0.5 lot You have to be prepared mentally for some bigger swings in you account, but at the end I'm trading with my 10000, not with 2000.
For some people it doesn't work as they think that 8000 needs to invested somewhere else - that means they just increasing overall leverage.
  • #6
  • Jun 6, 2018 6:52am Jun 6, 2018 6:52am
Quoting GeorgeBaile
{quote} You are right Hugelee; you are right! By the way, which leverage do you like to use in your trading?

i use high leverage in demo to see the performance how it works , but in real account i always use low leverage ratio for avoiding unfortunate losses.
  • #7
  • Jun 6, 2018 9:12am Jun 6, 2018 9:12am
Ok, I will explain it with an example:
Lets say your account currency is in EUR. The nominal value of 0,01 lot is 1000 EUR. So if your account is with 1:1 leverage, that means that you will need 1000 EUR to open 0,01 lot. If your deposit is 500 EUR, you will not be able to open any position. That's why, the leveraging method is very helpful, because if your account is 1:200 leverage, you will need only 5 EUR to open the same 0,01 lot. Because 1000/200 = 5. In our case, with 500 EUR deposit, you will be able to open 100 positions of 0,01 lot / or open 1 lot (no matter). Shortly the leverage helps you to open positions, without having the nominal value of the position.
  • #8
  • Jun 7, 2018 5:17am Jun 7, 2018 5:17am
Quoting DwainUK
Ok, I will explain it with an example: Lets say your account currency is in EUR. The nominal value of 0,01 lot is 1000 EUR. So if your account is with 1:1 leverage, that means that you will need 1000 EUR to open 0,01 lot. If your deposit is 500 EUR, you will not be able to open any position. That's why, the leveraging method is very helpful, because if your account is 1:200 leverage, you will need only 5 EUR to open the same 0,01 lot. Because 1000/200 = 5. In our case, with 500 EUR deposit, you will be able to open 100 positions of 0,01 lot / or...
It’s a good explain , thanks Mate for your nice post.
  • #9
  • Jun 7, 2018 6:33am Jun 7, 2018 6:33am
Quoting AlexImam
{quote} i use high leverage in demo to see the performance how it works , but in real account i always use low leverage ratio for avoiding unfortunate losses.
what you think , demos experience always work in a live account ? in my trading career, i was profitable with BB in demo but when i started in live account it didn't work as like demo.
  • #10
  • Jun 20, 2018 3:53am Jun 20, 2018 3:53am
@NathanAstel, the demo strategies never works on live
  • #11
  • Jun 20, 2018 12:11pm Jun 20, 2018 12:11pm
Quoting DwainUK
@NathanAstel, the demo strategies never works on live
Maybe, you are right but I practiced in demo price action and right now I am working with the same system in my live. No problem at all.
  • #12
  • Jun 22, 2018 9:54am Jun 22, 2018 9:54am
Quoting ZikriIrfan
{quote} Maybe, you are right but I practiced in demo price action and right now I am working with the same system in my live. No problem at all.
Good luck & Don't forget to share the result
  • #13
  • Jun 22, 2018 6:03pm Jun 22, 2018 6:03pm
Leverage is only a tool for retail traders. The more you use it the closer you become "worst gambler". With leverage basically you are betting on currrencies. Your actions mean nothing to the market. It just determines your bet size and it is given to you so you can blow up your account quicker.

Market moves with real trades. Direct trading. Just like the one you do in an exchange office. At the end of the day liquidity providers (banks) make a settlement with their customers (other banks, brokers, other financial institutions etc.). How much EUR bought in return how much sold an etc. and end up with a figure for each currency and when the transfer is made it is cleared. And that process goes on everyday.

Leveraged transactions however cleared within the broker. They match and settle all transaction within their pool and those left over deficit or suplus will be dealth through their interbank clearance.

Your leveraged transaction can make you rich or broke depending on your risk appetite. Some people have skills to use high leveraging in order to gain more in short time or within few pips. The part that makes one to be successful trader is not about leverage nor about trade frequency. It is all about risk management.

Leverage is a tool offered to the account holder. But it is not compulsory for one to use. You can trade like direct trading or you can use very low leverage. The lower leverage you use the safer you are but the lower gain per pip. So if you have 10,000 USD account and you are trading 0.1 lot on EURUSD that means you will make 1 USD per pip. If you make 30 pips it is 30 USD. This is 1:1 leverage. The broker gives you 100 -400 leverages not that they want you to make more money with 4 lot position but to make more commission on 4 lot. They don't care if you win or loose (if they are truely executing your order on interbank).

Not all brokers are making money through commissions alone. Thats where the leverage becomes sweet. Because it is a real fact that most retail traders are going to loose money. So why to just make money over the comissions where they can capture your loss as their profit. After all you are on an OTC market. So it is essential to choose the right broker .. they have to be regulated by a serious body (not an offshore or banana republic). That being said once you start to make a lot of money they start to turn things around (if they are not really carrying the trade to interbank). But that is something to be discussed when you become profitable consistantly and withdrawing huge amounts regularly.
  • #14
  • Jun 24, 2018 11:14pm Jun 24, 2018 11:14pm
Quoting DwainUK
{quote} Good luck & Don't forget to share the result
Surely, I’ll share my result; thank you very much mate.
  • #15
  • Jun 25, 2018 5:52am Jun 25, 2018 5:52am
Quoting Kxeroo
Leverage is only a tool for retail traders. The more you use it the closer you become "worst gambler". With leverage basically you are betting on currrencies. Your actions mean nothing to the market. It just determines your bet size and it is given to you so you can blow up your account quicker. Market moves with real trades. Direct trading. Just like the one you do in an exchange office. At the end of the day liquidity providers (banks) make a settlement with their customers (other banks, brokers, other financial institutions etc.). How much EUR...
Thanks Mate for your nice post , nice description it was with great example.
  • #16
  • Jun 25, 2018 6:50am Jun 25, 2018 6:50am
which leverage is more appropriate for demo trading can anyone make sure ? according to me, 1:50 is best.
  • #17
  • Jul 9, 2018 9:28am Jul 9, 2018 9:28am
Quoting NathanAstel
which leverage is more appropriate for demo trading can anyone make sure ? according to me, 1:50 is best.
I think 1:50 - 1:200 is appropriate. Generally it is good to practice on demo with the same leverage, that you wish to be on live further
  • #18
  • Jul 10, 2018 5:30am Jul 10, 2018 5:30am
Quoting DwainUK
{quote} I think 1:50 - 1:200 is appropriate. Generally it is good to practice on demo with the same leverage, that you wish to be on live further
Any kind of leverage ratio you can use in demo account, it’s a plc to see the leverage performance how it works.
  • #19
  • Jul 10, 2018 3:48pm Jul 10, 2018 3:48pm
but using high leverage in demo can make beginners greedy and emotional , so i don't agree.
  • #20
  • Jul 11, 2018 9:42am Jul 11, 2018 9:42am
If you guys allow me to summarize:
1. Yes, leverage can be your best friend and your worst enemy. It purely depends on whether you know what you are doing or not.
2. For sure, Leverage can help a retailer to enter the world of big money but it is purely on him if he can stay there in the long run.
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