Is 400:1 leverage better than 100:1? | Forex Factory

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Is 400:1 leverage better than 100:1?

  • #1
  • First Post: Nov 29, 2006 4:27pm Nov 29, 2006 4:27pm
...here's why I pose such a question, the cost to trade a position on a 400:1,
at 10,000 units is $48.65, compared to 100:1 postion at a cost of $194.61 to
trade.

...is there any reason why a high leverage would be more cost effective to trade?

...can anyone clearify this for me?
  • #2
  • Nov 29, 2006 5:02pm Nov 29, 2006 5:02pm
Quoting ANALEX
...here's why I pose such a question, the cost to trade a position on a 400:1,
at 10,000 units is $48.65, compared to 100:1 postion at a cost of $194.61 to
trade.

...is there any reason why a high leverage would be more cost effective to trade?

...can anyone clearify this for me?
It depends what you mean by better. I have a GBP mini demo . At 200: 1 leverage 1 lot represents £50.At 50:1 leverage, 1 lot represents £200. The leverage doesn't make any difference if I 'm only trading one lot, other than i would get a margin call at £50(per lot) with 200:1 leverage but at 50:1 leverage the margin call would be at £200 (per lot)Also, I can earn interest at 50;1 leverage, but not at any higher leverages.

The difference comes, if for instance you traded four lots.At 200:1 leverage, your risk, is four times as much (4lots of £50) than if you traded one lot at 50:1 leverage(1lot of £200).Your potential gains are also multiplied by four with a 200:1 rather than a 50:1 leverage.

So, if you're trading correctly a higher leverage will get you rich quicker. i f you're trading incorrectley, a higher leverage will lose you your money more quickly.
If you're trading correctley, a lower leverage will get you rich more slowly,
if you're trading incorrectley ,a lower leverage will allow you to hang on to your account that bit longer.
Have a think about it, and good luck. Hope I have been of help.
  • #3
  • Nov 29, 2006 5:07pm Nov 29, 2006 5:07pm
High leverage is the #1 cause of traders losing all their money. I STRONGLY recommend you never trade any more than 10:1, no matter how much money is in your account.
  • #4
  • Nov 29, 2006 5:11pm Nov 29, 2006 5:11pm
...I get the picture...thanks.







Quoting TheGreatMilenko
It depends what you mean by better. I have a GBP mini demo . At 200: 1 leverage 1 lot represents £50.At 50:1 leverage, 1 lot represents £200. The leverage doesn't make any difference if I 'm only trading one lot, other than i would get a margin call at £50(per lot) with 200:1 leverage but at 50:1 leverage the margin call would be at £200 (per lot)Also, I can earn interest at 50;1 leverage, but not at any higher leverages.

The difference comes, if for instance you traded four lots.At 200:1 leverage, your risk, is four times as much (4lots of £50) than if you traded one lot at 50:1 leverage(1lot of £200).Your potential gains are also multiplied by four with a 200:1 rather than a 50:1 leverage.

So, if you're trading correctly a higher leverage will get you rich quicker. i f you're trading incorrectley, a higher leverage will lose you your money more quickly.
If you're trading correctley, a lower leverage will get you rich more slowly,
if you're trading incorrectley ,a lower leverage will allow you to hang on to your account that bit longer.
Have a think about it, and good luck. Hope I have been of help.
  • #5
  • Nov 29, 2006 5:36pm Nov 29, 2006 5:36pm
Higher leverage allows you to open more positions. Sometimes this is useful. Like in an EA.

As with everything it depends on what you are trying to do.

Sometimes lower leverage is good because the margin call occurs quicker, so you save a larger portion of your account from ruin.
  • #6
  • Nov 30, 2006 4:03am Nov 30, 2006 4:03am
I use 1:500 but with tight stp loss, just in case...
  • #7
  • Nov 30, 2006 6:57am Nov 30, 2006 6:57am
Quoting ycomp
Higher leverage allows you to open more positions. Sometimes this is useful. Like in an EA.

As with everything it depends on what you are trying to do.

Sometimes lower leverage is good because the margin call occurs quicker, so you save a larger portion of your account from ruin.
Ok, this is confusing, could it be you got this backwards?

You mean lower leverage allows you to open more positions??
No wait, I guess I would use less of my margin with higher leverage, therefore I am able to open more positions....I wonder if I ever get that........
Steve
  • #8
  • Nov 30, 2006 7:56am Nov 30, 2006 7:56am
Quoting falcon232
High leverage is the #1 cause of traders losing all their money. I STRONGLY recommend you never trade any more than 10:1, no matter how much money is in your account.
Here is some interesting info I was reading about Hedge Funds and leverage...can't remember the source so I cant quote it verbatim but it was something like this...

The average hedge fund that uses leverage (not all do) use between 2 to 1 and 5 to 1. I think the exact average was something like 2.4 to 1. The article also stated that in very rare cases 15 to 1 was used by some.

It also noted that when Long Term Capital Management collapsed it was leveraged as high as 45 to 1 which was considered dangerously excessive.

The typical retail FX broker will offer their clients leverage anywhere from 50 to 1 to 400 to 1 luring people with the prospect of taking huge positions by posting small margins. In most cases due to restrictions on available capital this forces new traders to have to trade with very tight stops and most of us know that tight stops get hit often.

Monaco
  • #9
  • Nov 30, 2006 8:01am Nov 30, 2006 8:01am
Quoting PipSteve
Ok, this is confusing, could it be you got this backwards?

You mean lower leverage allows you to open more positions??
No wait, I guess I would use less of my margin with higher leverage, therefore I am able to open more positions....I wonder if I ever get that........
Yes higher leverage = lower margin. So the less margin you need to put up, the more positions you can open at a one time.

This is not always advisable, but it is the way many EAs work.
  • #10
  • Nov 30, 2006 1:34pm Nov 30, 2006 1:34pm
High leverage = High profits = High risk = high lost
  • #11
  • Nov 30, 2006 1:41pm Nov 30, 2006 1:41pm
Quoting myhelmi
High leverage = High profits = High risk = high lost
Simple enough, I think I got it, thank you all!!
Steve
  • #12
  • Nov 30, 2006 2:21pm Nov 30, 2006 2:21pm
yes, 400:1 is better than 100:1 if you can handle your greed and trade at appropriate size.

But you don't usually earn swap/interest at 400:1.
  • #13
  • Nov 30, 2006 3:42pm Nov 30, 2006 3:42pm
I try to wrap up what everyone else said with a few examples:

In these examples suppose your base currency is USD and and your current balance is $10,000. Also you get a margin call if your free margin drops below $500.

Higher Leverage and Money Mangement

Higer leverage without money management is a real killer. If you decide to trade GBPUSD long and the current price is 1.9000:

(A) With 100:1 you may purchase 4 standard lots and consume $7600 of your margin (4*100000*1.9/100=7600).

(B) With 400:1 you can purchase 16 lots and consume the same amount of your margin (16*100000*1.9/400=7600).

In case (A) every pip costs you $40 (i.e. 1pip*$10) while in case (B) every pip costs you $160. Now if the price drops to 1.8983 in case (A) your free margin drops to $1720 (i.e. you've lost $680). You've lost a substantial amount of money but you are still in the game. In case (B) you lose $2720 (17pips*$160) and your free margin drops below zero ($7600+$2720>$10000). Your broker stops you out and you are out of the game losing over 27% of your account in a single trade and just by a 17 pip movement.

With Money Manegment You Usually Don't Care about Leverage
If you have MM rules in place you usually use position sizing and risk a specific amount of your money. For example you decide to set VAR (Value At Risk) to be 5% of your account size (i.e. you risk $500 of your account balance per trade).

With this system in place if your stop loss is set to be 50 pips from your open price you won't trade more than 1 lot. Because with 1 standard lot each pip will cost you $10 and 50 pips is $500 or 5% of your account.

Now whether you have a leverage of 400:1 or 100:1 you only buy 1 lot. However, with higher leverage you consume less margin (i.e. $425.00 vs $1900.00 if the price of GBPUSD is 1.9000). But as far as you are far away from margin call it doesn't really matter, does it?

Higher Leverage Helps You Trade More Currency Pairs (or have more Open Trades)
One of the approaches that you can reduce your chances of loss is to trade several pairs at the same time. In this case a higher leverage is really helpful. For example if you trade 1 standard lot for each pair with 100:1 and $10000 account balance you might not be able to trade more than 3 or 4 trades but with 400:1 trading 4 or even more pairs at the same time is not an issue.

The same situation is true if you decide to have several trades open at the same time.

Conclusion
The bottom line is that higher leverage can be used as a winning tool in the hand of a professional trader but be a killer if used by a novice trader.

Good Luck,
Al
  • #14
  • Dec 1, 2006 3:39pm Dec 1, 2006 3:39pm
Quoting ANALEX
...I get the picture...thanks.

...okay I got margin called on a good trade, using 100:1 leverage on a game
platform from fx sol. The thing is if I had used 400:1 instead I would of profited...here's the math;



balance= $4.222.37
x20 lots= $3960.50(I admit that's foolishly
high), but my point is I would of stayed in the game if the margin was higher. I was trying to gain some ground, but 100:1 would not let me.
  • #15
  • Dec 1, 2006 3:42pm Dec 1, 2006 3:42pm
Quoting ANALEX
...okay I got margin called on a good trade, using 100:1 leverage on a game
platform from fx sol. The thing is if I had used 400:1 instead I would of profited...here's the math;



balance= $4.222.37
x20 lots= $3960.50(I admit that's foolishly
high), but my point is I would of stayed in the game if the margin was higher. I was trying to gain some ground, but 100:1 would not let me.
With this mentality if you get a higher leverage you will trade more number of lots.
  • #16
  • Dec 2, 2006 1:57pm Dec 2, 2006 1:57pm
Higher leverage generally narrows your stop loss. If your trading method revolves around shallow stop losses, then higher leverage is a welcomed tool.
Binary Options Trader
  • #17
  • Dec 2, 2006 2:24pm Dec 2, 2006 2:24pm
Quoting Yoda_Glenn
Higher leverage generally narrows your stop loss. If your trading method revolves around shallow stop losses, then higher leverage is a welcomed tool.
Thank you Yoda, but if you don't mind explaining this to me in more detail, I do not see how leverage has an influence on my stops.
Sorry if I don't get it right away....
but I appreciate your help.
Thank you.
Steve
  • #18
  • Dec 2, 2006 4:16pm Dec 2, 2006 4:16pm
For folks following this thread I'd really urge you to hop across to the thread on "Determining risk" - this is all about how to set your gearing factor to maximise wealth whilst minimising your chance of blowing your account based on the statistics of your system.

As a few people have said on this thread, it's not whether 400 is better than 100 it's what's right for your system - the above thread will show you how to determine this factor.
  • #19
  • Dec 3, 2006 12:01am Dec 3, 2006 12:01am
really the leverage doesnt come into account.

if you have a stop of 25 pips, and you are betting 1 full lot that is 10$ a pip then you are risking $250. Thats all you really need to worry about is how much money you will loose on a trade, the leverage really doesnt matter.

Only thing higher leverage does is lets you bet an insane amount per trade. You dont really need that much leverage. say your bankroll is $1000 and you were going to bet 20% of your account per trade and you had a 10pip stop on euro so $10 a pip for a full lot.

1000*20% = $200 for risk / 10 pips = $20 a pip risk / $10 a full lot = 2 lots

in order to buy 2 lots with 1000$ you would need to get a full lot for 500$.

full lots = 100,000$ / 500$ = 200 or 200:1 leverage.

As you prolly know trading 20% of you account means you have an amazing system or you are totally crazy, so even if someone is trading crazy they would be hard pressed to need 200:1.

A realistic example would be: say your bankroll is $1000 and you were going to bet 3% of your account per trade and you had a 20pip stop on euro so $10 a pip for a full lot.

1000*3% = $30 for risk / 20 pips = $1.50 a pip risk / $10 a full lot = 0.15 lots

in order to buy 0.15 lots with 1000$ you would need to get a full lot for 6,666.66$.

full lots = 100,000$ / 6,666.66$ = 15 or 15:1 leverage.


so in the end, if you have 200:1 and you are trading and think, dern I wish i had 400:1, you might reconsider your trading plan
  • #20
  • Dec 3, 2006 1:54am Dec 3, 2006 1:54am
Quoting witchazel
really the leverage doesnt come into account.

if you have a stop of 25 pips, and you are betting 1 full lot that is 10$ a pip then you are risking $250. Thats all you really need to worry about is how much money you will loose on a trade, the leverage really doesnt matter.
I'm afraid I have to disagree - it's not what you are likely to lose on one trade, it's how much are you likely to lose during the worst drawdown you're system is likely to suffer following a bad sequence of trades. Backtesting over several years of historical data will give you an idea of the largest expected drawdown, which then allows you to calculate what leverage you can afford before going broke when that drawdown occurs.

Trading even 100:1 means that if your worst sequence of trades gives rise to a 1% drawdown - i.e a drop of say 132 pips on your accumulated profit on eurusd will lose you all your capital. 400:1 equates to a 31 pip fall and you're gone !

Or am I missing something here ?
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