higher leverage = safer? | Forex Factory

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higher leverage = safer?

  • #1
  • First Post: Aug 12, 2007 12:11pm Aug 12, 2007 12:11pm
Hello all.

I am still trying to firmly understand leverage. To my knowledge a high leverage account is not inherently higher rish than a low leverage account. Rather high leverage is a tempation for a new trader to over expose his risk or take bigger positions that he really should. However if you are carefull than higher leverage can be safer.Example

If you have a 5k account with 100:1 leverage and you open a lot on GBP/US your used margin is 1k and your unused margin is 4k.

However with a 400:1 leveraged account with the same 5k balance you again buy one lot of GBP/US and this time your used margin is only $250 dollars and your unused is $4750

In both scenarios you have a pip value of $10. So say your sl was 40 pips. So with your 100:1 leveraged account your risking $1400 or 28% of your account on one trade. Now on your 400:1 leveraged account your risking $650 or 13% of your account.

In the case of 400:1 leverage your have much smaller percentage at risk of what you are willing to lose than the 100:1 account even though your potential to gain is equal. This being the case higher leverage is more safer than low leverage as long as you take the appropriate risks.

ps i know opening 1 lot on a 5k account is foolish. This is for demonstration purposes only. The point is if you only risk 2% or 3% of your account it can be done safer with higher leverage. Am i right here?
  • #2
  • Aug 12, 2007 12:23pm Aug 12, 2007 12:23pm
In the first example, the broker has reserved 1k of your 5k as margin. This means you can lose 4k. Once your loss hits 4k, the trade is shut down and your margin is released. You'll have 1k in your account because you lost the 4k.

In the second example, the broker has reserved $250 of your 5k as margin. This means you can lose $4,750. Once you do so, the trade is shut down and your margin is released.

Which one is better?
  • #3
  • Aug 12, 2007 12:53pm Aug 12, 2007 12:53pm
Thx for the reply. Why are you ignoring the "So say your sl was 40 pips" part?
  • #4
  • Aug 12, 2007 1:31pm Aug 12, 2007 1:31pm
No this is not correct. You risk 40 Pips regardless of what your leverage is. This equates into the same dollar amount no matter if you use 100:1 or 400:1.

I agree that high leverage can be used to a traders advantage and the very reason FX trading is so appealing. You must be careful to always use stops and control your exposure no matter what leverage you choose.



Quoting saskgui
Hello all.

I am still trying to firmly understand leverage. To my knowledge a high leverage account is not inherently higher rish than a low leverage account. Rather high leverage is a tempation for a new trader to over expose his risk or take bigger positions that he really should. However if you are carefull than higher leverage can be safer.Example

If you have a 5k account with 100:1 leverage and you open a lot on GBP/US your used margin is 1k and your unused margin is 4k.

However with a 400:1 leveraged account with the same 5k balance you again buy one lot of GBP/US and this time your used margin is only $250 dollars and your unused is $4750

In both scenarios you have a pip value of $10. So say your sl was 40 pips. So with your 100:1 leveraged account your risking $1400 or 28% of your account on one trade. Now on your 400:1 leveraged account your risking $650 or 13% of your account.

In the case of 400:1 leverage your have much smaller percentage at risk of what you are willing to lose than the 100:1 account even though your potential to gain is equal. This being the case higher leverage is more safer than low leverage as long as you take the appropriate risks.

ps i know opening 1 lot on a 5k account is foolish. This is for demonstration purposes only. The point is if you only risk 2% or 3% of your account it can be done safer with higher leverage. Am i right here?
  • #5
  • Aug 12, 2007 1:40pm Aug 12, 2007 1:40pm
Whenever you open a trade, your entire account is at risk. Sure, 99.99999% of the time you'll get out where you want to get out, but the reality is you can lose it all.

Also, in your example, what is at risk is not the margin, but your money that's not tied up in leverage. In both scenarios of a pip value of $10 and with a stop of 40 pips, the risk is the same...$400.

The money tied up in margin is safe because the trade will be shut down before it is used. So to say that putting less into margin is safer is just out and out wrong. The less you use for margin means you have more available to lose.

You need to study this stuff until you understand it because you'll get nailed if you don't.
  • #6
  • Aug 12, 2007 1:43pm Aug 12, 2007 1:43pm
Thx for the reply Roland. However I must really suck at explaining myself. Yes i do realize that i am risking 40 pips that are worth $10 each on each scenario.

I also realize that the tempation of high leverage means that some will take postision too large for their account.

My point is that if you understand leverage why not always go with the highest possible (in this scenario 400:1) and with appropriate risks enjoy that fact that you have very little capital exposed to the market. In real life i would trade perhaps 1 mini on a 5k account. With 400:1 leverage i am only putting up $25 to buy a mini. Than with a 40 pip stop loss that would be a loss of $65 (assuming USD pair). That is just over 1% at risk.

However if i had a 100:1 leverage account i would have to spend $100 to buy that mini. Add a 40 pip stop loss and i am exposed $140 to the market or close to 3% risk of my capital.

Is the choice not obvious? Higher leverage is lower risk as i expose less of my capital to a possible loss in the market. Why would you rather expose almost 3% of your account rather than just over 1% if you have the choice? What am i missing here?
  • #7
  • Aug 12, 2007 1:49pm Aug 12, 2007 1:49pm
Quoting Dopey
Whenever you open a trade, your entire account is at risk. Sure, 99.99999% of the time you'll get out where you want to get out, but the reality is you can lose it all.

Also, in your example, what is at risk is not the margin, but your money that's not tied up in leverage. In both scenarios of a pip value of $10 and with a stop of 40 pips, the risk is the same...$400.

The money tied up in margin is safe because the trade will be shut down before it is used. So to say that putting less into margin is safer is just out and out wrong. The less you use for margin means you have more available to lose.

You need to study this stuff until you understand it because you'll get nailed if you don't.
So you are saying stop losses cannot be counted on and each time you enter a trade you are risking your entire account?

I do understand that your unused margin is what is at stake here to lose. However once again i am using stop losses. If there are honored than i don't understand why i should be concerned?

Are there people who trade live that lose most or all of their account because their stop losses are not kept? Are you saying margin call is a better stop loss and the higher used margin you have the better as it will preserve more of your capital in case your stop losses are not honored?
  • #8
  • Aug 12, 2007 2:33pm Aug 12, 2007 2:33pm
Quoting saskgui
So you are saying stop losses cannot be counted on and each time you enter a trade you are risking your entire account?

I do understand that your unused margin is what is at stake here to lose. However once again i am using stop losses. If there are honored than i don't understand why i should be concerned?

Are there people who trade live that lose most or all of their account because their stop losses are not kept? Are you saying margin call is a better stop loss and the higher used margin you have the better as it will preserve more of your capital in case your stop losses are not honored?
I found it hard to grasp all this when I started but I suggest you read this thread on Money Management (if you haven't had a chance yet) and get to grips with the difference between B roker Leverage and True Leverage.
True Leverage is what you need to concentrate on, and try not to exceed 5:1 (lower is better) per trade. Once you can understand this, you will realise why looking for a B roker that offers 400:1, when you're starting out, will help you survive longer.
  • #9
  • Aug 12, 2007 3:29pm Aug 12, 2007 3:29pm
Ok Peter. So in my recommended example of having a 5k balance on a mini account my true leverage is 10,000/5000 = 2:1.

This does not actually have anything to do with brokerage leverage like i was talking about, however it is helpfull to know. One thing i noticed is the most people on this forum are calling your used margin "leverage". I will have to get used to that. I thought the term leverage was only used with broker leverage. Beyond that i use the terms used margin and unused margin for simplicity.

One odd thing that i read by dialist is that you should not start out with a mini with less than 30K. That would mean with one lot of 10 open your true leverage would be .33:1! Is that not overkill?

Anyways the topic of this thread was intended towards broker leverage and i see it was somewhat confusing. So far from all the posts no one has given me any reasons why not to open an account with a broker with 400:1 leverage as long as your true leverage is kept low, say below 2:1. Irregardless of what your account size is.
  • #10
  • Aug 12, 2007 3:36pm Aug 12, 2007 3:36pm
Quoting saskgui
Ok Peter. So in my recommended example of having a 5k balance on a mini account my true leverage is 10,000/5000 = 2:1.

This does not actually have anything to do with brokerage leverage like i was talking about, however it is helpfull to know. One thing i noticed is the most people on this forum are calling your used margin "leverage". I will have to get used to that. I thought the term leverage was only used with broker leverage. Beyond that i use the terms used margin and unused margin for simplicity.

One odd thing that i read by dialist is that you should not start out with a mini with less than 30K. That would mean with one lot of 10 open your true leverage would be .33:1! Is that not overkill?

Anyways the topic of this thread was intended towards broker leverage and i see it was somewhat confusing. So far from all the posts no one has given me any reasons why not to open an account with a broker with 400:1 leverage as long as your true leverage is kept low, say below 2:1. Irregardless of what your account size is.
I'm with you all the way. Please read my Newbie thread, but to save you time start at Post #19. You can read the rest of my stuff at a later date, if you're really bored lol/
  • #11
  • Aug 12, 2007 5:30pm Aug 12, 2007 5:30pm
Quoting saskgui
In both scenarios you have a pip value of $10. So say your sl was 40 pips. So with your 100:1 leveraged account your risking $1400 or 28% of your account on one trade. Now on your 400:1 leveraged account your risking $650 or 13% of your account.
Saskgui, the way I see it, it's simply a question of viewpoint, as to whether you choose to express the absolute dollar risk ($400) as a percentage of the absolute dollar amount in your account ($5,000), or in terms of the maximum amount that the leverage permits to be traded.

If we think laterally enough, we can always express an absolute amount in terms of a percentage of any other amount that we wish. That is the nature of percentages.

Having said that, according to "conventional wisdom", the "2% safety rule" used in fixed fractional sizing is based on the absolute dollar value in your account. To calculate it any other way would be invalidating the safety guideline underlying the rule.

However we choose to calculate the percentages, the risk remains $400, and losses of $5,000 will blow the account. Regardless of leverage, the higher the position size, the higher the risk.

David
  • #12
  • Aug 12, 2007 5:50pm Aug 12, 2007 5:50pm
Quoting saskgui
Hello all.

I am still trying to firmly understand leverage. To my knowledge a high leverage account is not inherently higher rish than a low leverage account. Rather high leverage is a tempation for a new trader to over expose his risk or take bigger positions that he really should. However if you are carefull than higher leverage can be safer.Example

If you have a 5k account with 100:1 leverage and you open a lot on GBP/US your used margin is 1k and your unused margin is 4k.

However with a 400:1 leveraged account with the same 5k balance you again buy one lot of GBP/US and this time your used margin is only $250 dollars and your unused is $4750

In both scenarios you have a pip value of $10. So say your sl was 40 pips. So with your 100:1 leveraged account your risking $1400 or 28% of your account on one trade. Now on your 400:1 leveraged account your risking $650 or 13% of your account.

In the case of 400:1 leverage your have much smaller percentage at risk of what you are willing to lose than the 100:1 account even though your potential to gain is equal. This being the case higher leverage is more safer than low leverage as long as you take the appropriate risks.

ps i know opening 1 lot on a 5k account is foolish. This is for demonstration purposes only. The point is if you only risk 2% or 3% of your account it can be done safer with higher leverage. Am i right here?
with 400:1 leverage you just have more haging rope to hang yourself, you also have more room to let your trade go in the red and with a prayer come back in the green.
If I Go Broke Trying Then I Will die happy.
  • #13
  • Aug 12, 2007 6:40pm Aug 12, 2007 6:40pm
Quoting Moe
with 400:1 leverage you just have more haging rope to hang yourself, you also have more room to let your trade go in the red and with a prayer come back in the green.
Hmmm... Moving to the Optimistic Side...
You also have greater opportuinty to advance.

Just a word toward the guarded restriction of "Trade at Your Minimum."

There is a point in the future where you will consider all this advice as secondary and then you will have to decide on your own how much to risk.
How are you going to deal with that?

Do you see James offering Charles advice? Does Charles need it? Why not?
It's a quantum shift in attitude that will happen in one fell swoop. Then, after a while, [a long while for some of us] you will be advising others right here.

I don't think Anyone here is professing that you should Never Take A Risk beyond the MM Math. Just that you should be aware of your exposure.
  • #14
  • Aug 12, 2007 7:36pm Aug 12, 2007 7:36pm
also it depends on your trading system i know a trader who took a mini account to 250,000 in 5 months with 400:1 leverage.
If I Go Broke Trying Then I Will die happy.
  • #15
  • Aug 12, 2007 7:39pm Aug 12, 2007 7:39pm
Quoting Moe
also it depends on your trading system i know a trader who took a mini account to 250,000 in 5 months with 400:1 leverage.
b.t.w. i should metion that he loss 80% of that on 1 trade, he kept using high leverage, so you can make a lot of money with high leverage that how i got where im at today but once your account get a certain size you should be trading for a living not to get rich quick.
If I Go Broke Trying Then I Will die happy.
  • #16
  • Last Post: Aug 12, 2007 8:03pm Aug 12, 2007 8:03pm
The real issue is: Do you have the discipline to trade it sensibly? - or will you blow up?
With a 400:1 margin acct you can trade a 1.2 K acct as if you had 5K in a 100:1 account. Keep 1.2k w/ your broker and the 3.8K in your bank. That is the only reason, IMHO to use a 400:1 Broker leverage.
Once the 1.2K is gone you can congratulate yourself on how smart you were to not trust yourself to be disciplined enough to use proper money management.
In trading, there is no bullshit. You either make money or you don't.
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