Increasing and Decreasing Leverage

Firstly, I know that I write sometimes like a know it all. I actually don't know it all. I only read and retain what interests me and what I think will help me in some ways. The rest goes out the window thanks to my builtin anti cluttering system.

So, when it comes to leverage, I do what works for me. Upon signing onto a broker, I set the leverage to the highest possible and leave it at that. There are a lot of variables in Forex. Why should I add another variable? However, once in a while, I come across instructions to an EA or a trading system where the author suggests to lower the leverage at some point and increase it at another. Normally I ignore that piece of instruction and in my mind replace it with: Always set your leverage at maximum but use it gingerly and wisely.

Now I'm thinking maybe I'm missing something and I like to find out if I am for sure. They say leverage is a two sided sword. It can increase your gains and it can amplify your losses. Let's start with that statement.

I know why it can increase my gains. Obviously it is easier buying something for a fraction of the cost than buying it at face value. So for the sake of simplicity, let's say for a $1000 account, I have a leverage of 1:1000 and it costs me $10.00 to enter a trade in a pair with that leverage. If I reduce it to 1:500, it costs me $20.00 of my available leverage for the same trade. At 1:500 if my trade goes horribly wrong and I have a huge $950 DD, at that point it is wise to increase my leverage to 1:1000 so instead of blowing my account when the DD reaches $980, this will give me another $10 of relief. (assuming the margin call formula is: Margin is Free Margin = Equity – Margin).

Now in the above example, if I had my margin set at 1:1000, there would be no benefit to me by changing margin level. Changing margin to 1:500 would harm my situation. So, the question is: Why would I ever want to lower my margin?

I think the answer is for the fear of myself and to stop myself from thinking that I have a lot of available leverage. So I deceive myself and pretend I have only 1:500 margin and if things get tough, suddenly, I undeceive myself pull out this hidden extra 1:500 margin and bail myself out. Is that right? is this designed for traders that with a 1:500 leverage would use $20 of it on one trade and if you give them 1:1000 leverage, then they are going to think: hey, I used $20 on one position and now that I have got a 1:1000 leverage, it shows I am using only $10 leverage. So I better go get into another position and bring it back to $20 leverage used. Now this trader has doubled their risk. So in this case, with this kind of thinking, double the leverage, means double the risk. This is why leverage has two edges. It will increase your risk IF YOU USE THE EXTRA LEVERAGE.

Is that why the regulatory bodies are lowering leverage because they think lower leverage=lower risk taken by the trader and higher risk=higher risk taken by the trader?

Am I right so far or am I missing something? How about the rest of us careful traders who enter only that one trade whether the leverage is 1:500 or 1:1000?

Alright, one more thing: I came across this photo of a lady using a lever (that's where the word leverage comes from) to open the tire bolts of a heavy truck. First thing you may notice is that she looks like she has a hard time turning the wrench. Then you may notice that she has one hand half way on the lever and the other maybe 3/4 at best. Also, she is using her leg to help her pull. My advice to ease her job and to help her become successful at this challenge would be for her to use her full leverage. I have actually been to mechanic shops where experienced mechanics use the identical tool for the exact purpose and they use the uppermost end of the lever to grip and pull down and it works beautifully.

I saw this photo first in this thread: https://www.forexfactory.com/showthr...0#post11591050 post#1

Read a few posts under. She (the thread starter) has apparently gone postal on me. I would have asked her directly why she is so mad but she has put me on her ignore list. I didn't even know that FF had an ignore button. She suggested I start my own thread for my comments since they are apparently garbage and she posted a pic of some suggestively dressed lady referee giving me a red card and a reference to old ladies. HUH! Can anyone else tell me why this?

Higher leverage means lower margin required... which if used correctly actually reduces risk. Most people are delusional and just automatically think higher leverage equates to higher risk.

Source of the photo before I get my head ripped off for stealing her favorite photo: https://youbetterbelieveit.wordpress...only-in-india/

Apparently she thinks of it as 'working hard'. Maybe my comment meant to her as 'working smart' and therefore offensive somehow!

Thats the regulators propaganda and majority of retail traders are singing that same song, mostly people that have not even googled a few searches on leverage to understand what it is and what it is not.

Above 1:30 yes, IMO

but 1:30 is fantastic

add to that NBP and it's pure bliss

It is really is quite sad people are not willing to think for themselves and just blindly believe whatever they read. If you cant read and analyse information to see whether it is actually true then I can already tell you're a consistent loser in this game.

For a little something for you to chew on, here is a post on a different way of thinking about leverage, by one of the great minds on this forum, nanningbob:

"We have had a similar discussion before so let me hit on two issues you have brought up. High leverage deceives you on the amount of funds you have available to trade. You will see the percent of the account put into play is very low with high leverage when in reality you have too much funds committed to lots. Yes you can just use small lots and still use high leverage but when you look at the figures at the bottom you will think you have lots of funds left to trade with when in reality you dont. That is the deception. Now could I trade high leverage and stay with small lots. Yes I could but a critical piece of information is missing when I trade. When I trade at 25:1 I have more of my money in play and the percentage numbers will be much different at the bottom of the screen. I can see the amount of money I have left to put into play is getting smaller and I am committing too much funds in total. So with that warning I quit adding trades or I start closing out trades that arent doing anything. You dont get that information with high leverage until its way too late. You are already a goner. Low leverage I can see my percentage left to play with is reaching the 300% then 200% levels I know I have too many lots in play and I can close some out with out damaging my account balance. With high leverage you get down to that 200% level, you already are cooked and you have to damage your account to close out trades. That is a big deal that very very few traders understand or even consider when trading. I stay out of trouble with my account because I can see that percentage number with low leverage and know its time to clean some junk out. High leverage accounts show you still have funds to play with when in reality you have already strained your account to its limit. You are done but you dont know it yet.

The second issue is swap costs are the same, or the interest rate is the same whether you have high/low leverage. That also is a big deception. WHY? Because the interest rate maybe the same but the amount you borrowing is far different. If I put 400,000K in play with my 1000 dollars 400:1 leverage or I can only play 25K into play with 25:1 leverage, the interest or swap is the same but the amount you are paying compared to me is a BIG BIG difference. 10% interest on 400K over one year is 40,000 dollars. 10% interest on 25K over one year is 2500 dollars. You will pay 16X more money in interest trading the same size lots and trades that I do but you will not make anywhere near as much money as I do. Interest costs will eat up your profit from that 1000 dollar account. Again this is an area very very few traders comprehend or understand. The idea is swaps are the same so it makes no difference is very faulty logic. It shows that the trader doesnt understand the amount of money he is borrowing and the cost of borrowing that money to trade with. All he is thinking is the interest rate is the same so it doesnt matter. Well it does and long term you are really making less than you would with a lower leverage account.
Well I hope I explained this good enough to understand. I tried my best."

Your buddy is telling us about his OCD with margin%. I don't even bother looking at that. I just checked. In about 10 live accounts I'm trading currently, the lowest is 5000% and the highest is 168000%. My swaps are usually positive or even. I don't even understand the fuss with the Islamic accounts since it's not an issue. All accounts in profit currently too. My free margin in all accounts exceed my deposits by leaps. In other words, I'm trading with excess margin. I can't say risk free because who knows how the market is going to go tomorrow.

I guess it comes to trading style. I'd hate to be looking at the margin% (I have done it before), so I make sure I don't have to. If I had a 25:1 broker, I'd be trading only in one account and probably glued to that stupid margin% eating my nerves away. Thank heaven I don't have his problems.