Leverage Q

After reading more about money management, I finally understand the danger of high leverage. I ran through a demo account at 400:1 in no time (big surprise there lol) and decreased it to 10:1 which I've managed to keep profitable but that's mostly been dumb luck. But I now think even that leverage is too high since I can't really keep my risk to 1% per trade.

I guess for a newbie maybe 2:1 leverage would be good? 1:1?

Can the leverage be changed after an account is open? Doesn't look like there's a way to do it using Metatrader with StrategyBuilderFX (demo), but I guess that would really be a change with the broker.

Squid

Can you explain more about your new found knowledge? I still don't see how the leverage affect mony management. I can trade $0.10/pip at 50/1 leverage or $0.10/pip at 20/1 leverage and still face the same risk...

Maybe I'm missing something then. When I opened the demo account I had to choose a leverage which I now realize is too high for my experience level. But it seems I can't change the leverage now, so all I can do is play around with the lot size and the stop loss to decrease risk. But even doing that on such a small account I can't keep from risking more than 1% of my core equity.

Am I misunderstanding something?

Squid

Something else on "leverage" i recently got wind of (thx Dial).

Lets say your personal risk is 1% risk at a 1:1 leverage, or 2:1 leverage. That this is the actual mathmatical amount your style and plan sets for a rule.

Now lets say you have a $1000 micro at .10pip = 1Lot = $1000
By the rules at 1:1 leverage you can open a 1 Lot trade, or 2 Lots at 2:1

I'm not saying the above is a way to riches, but it will preserve your capital. As for a stop loss? Well you can do the math, but say you have your account set at the default of many brokers at 100:1...or maybe you set it at 200:1?..you probably won't ever get a margin call.

: )
Thom

Try reducing your lot size (use a mini lot), or reduce the number of lots. If your account is < 5k, trade mini lot(s).

Yeah, you're missing something...

as stated numerous times in this forum, leverage does not necessarily equate to risk.

at 400:1 you will lose the same amount per pip per lot as you would at 2:1 leverage. It makes absolutely no difference.

The difference is how big you size your lots and how much you decide is the maximum you can lose.

here's the issue...1% risk factor means that 1% is the maximum LOSS per trade...so, if you have a $1000 account, your maximum loss is $10...period.

That means that if you decide to trade 1 micro mini lot (at $0.10 per pip), you can lose a MAXIMUM of 100 pips on a trade...now, your MARGIN requirement will be less, which means at 400:1 you will have an available balance of $997.50 if you bought 1 micro-mini lot. In contrast at 2:1 leverage you would have an available balance of $500...that's what leverage gives you.

With a risk-factor of 1%...Now, if you trade 1 mini lot, you can lose a maximum of 10 pips (at $1 a pip), but at 400:1 leverage your available balance will be about $975 (assuming a near 1-to-1 ratio with the currency you're trading against the USD), however at 2:1 leverage, you couldn't take this trade because your margin requirement would be about $5000...

So you see, risk is still the same, but your margin requirements will be different.

It's true that you could trade more lots with 400:1 leverage, but your risk factor would be reached at a smaller pip loss much quicker.

My guess is that you're trying to calculate 1% of your account as your TRADE SIZE...not your RISK FACTOR. 2 different things.

mrmikal, you are correct.

Do keep in mind that leverage does have a benefit to the user if the user understands the purpose. The wealthy use high leverage. People thing because the wealthy have a lot of money that they do not use leverage. That is not true. The know when to use it and not use it. With the proper use of leverage I can turn $25,000 into $1,000,000 in one year. I believe most people should not use leverage.

forget about the leverage ratios, 100:1, 400:1, 50:1, etc, just open an account with oanda where you can trade micro lots, you can even set the value of each pip, so you can say 1 pip = $0.10 or 1 pip = $0.50, etc

if you are a begginner in forex then don't make 1 pip worth more than 1$, there's so much more you have to learn about forex. That's the most common mistake begginers will make: start dreaming about how much money they could make in the shorter period of time ...

From now on just start looking for an edge, then until you have mastered that edge you can start thinking about the leverage, money managemnet, etc.

if you don't have an edge then you're just gambling ....

Your risk is your real leverage.
L = S/E
L - leverage
S - the sum in dollars of all your open position
E - equity

Just have a look at the Money Management Spreadsheet in http://www.forexfactory.com/showthread.php?t=20528 and all the rest in the topic
leverage 10-20 normal
leverage 20-40 proffessional
One must have the risk paid off. The leverage may be up to 80, if you know what you do

if your position is intended to be 1%, but now 2%,..... double your equity,
just keep adding the equity,,,
or in demo account, start with the smallest one.(smallest lot, smallest equity)

Wow! Interesting to see this post come up again as it was one of my first and I was still trying to figure everything out. Things have really changed in the year or so that I've been learning to trade and it makes me realize how far I've come. Still a long ways to go but at least I'm live now and profitable. :-) And it was this place that gave me my start. Thanks guys!

Squid

Hi,

I just clicked on your alias of "Squid" as that's a nickname for US Navy sailors, of which I am a former one. As far as trading goes, I'm even greener now than you were then. I've SnagIt'ed your original post and the subsequent thread for its educational value. Best wishes. I hope you ship comes in.