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Leverage confusion

  • #1
  • First Post: Feb 27, 2009 1:09am Feb 27, 2009 1:09am
Low leverage is recommended by professionals, but does it really matter the leverage you are using if you are only risking a set amount of your account? That is if I risk 1% of my capital on 1 trade, how does it make any difference if I am using 50, 100 or 400 leverage? Surely the only difference will be the amount of margin used/still available. Higher leverage allows you to enter larger trades than you otherwise could, but if you are disciplined enough to only use (eg) 1% of your capital at any one time, how does the actual amount of leverage matter?

Am I missing something here?
  • #2
  • Edited 2:11am Feb 27, 2009 1:41am | Edited 2:11am
Quoting bobsmith
Low leverage is recommended by professionals, but does it really matter the leverage you are using if you are only risking a set amount of your account? That is if I risk 1% of my capital on 1 trade, how does it make any difference if I am using 50, 100 or 400 leverage? Surely the only difference will be the amount of margin used/still available. Higher leverage allows you to enter larger trades than you otherwise could, but if you are disciplined enough to only use (eg) 1% of your capital at any one time, how does the actual amount of leverage...
Leverage offered by brokers refers to the percentage of margin required on a given position.

True leverage, is what you are describing, where it will depend on how much equity there is on the account, and what percentage of it you are using on a single position, and the relationship is calculated between lots traded and account equity.

This true leverage is which is recommended to be low.

To USE 1% is not the same, though, as to RISK 1% (unless your risk is set at 100% of your position, like 100 pip stops).


Example:
Account equity $10000
Position size = 0,1 lot = $1 per pip
Risk 100 pip = 1% of equity
Leverage from broker 1 = 200:1 - Margin required = $50
Leverage from broker 2 = 100:1 - Margin required = $100
Leverage from broker 3 = 50:1 - Margin required = $200
Lots traded = 10000 units (0,1 lot)
Account equity = $10000
True leverage of the position = 1:1
Free margin (not counting the spread) =
Broker 1 = $9950 or 9950 pips
Broker 2 = $9900 or 9900 pips
Broker 3 = $9800 or 9800 pips


If your risk in pips is smaller you can open a bigger position, the risk percentage remains the same but the leverage and margin required will change, as well as the free margin available:

Account equity $10000
Position size = 0,2 lot = $2 per pip
Risk 50 pip = 1% of equity
Leverage from broker 1 = 200:1 - Margin required = $100
Leverage from broker 2 = 100:1 - Margin required = $200
Leverage from broker 3 = 50:1 - Margin required = $400
Lots traded = 20000 units (0,2 lot)
Account equity = $10000
True leverage of the position = 2:1
Free margin (not counting the spread) =
Broker 1 = $9900 or 4950 pips
Broker 2 = $9800 or 4900 pips
Broker 3 = $9600 or 4800 pips

Indeed, the extra high leverage is meant to allow much larger trades, increasing the risk in the same proportion...

Using the full broker's leverage is almost impossible because of the spread and risk. However, a few people do it, opening positions with 85-90% of their account equity and with a higher leverage (like 400:1 or 500:1).

In a "slightly smaller" proportion:
At 200:1, you could theoretically open up to 6.6 lots ($66 per pip) risking 66% of your account with those same 100 pips, and $3300 margin required.
True leverage: 66:1
At 100:1, 5 lots ($50 per pip), 50% risk on 100 pips, $5000 margin required.
True leverage: 50:1
At 50:1, 3.3 lots ($33 per pip), 33% risk on 100 pips, $6600 marqin required.
  • #3
  • Feb 27, 2009 2:46am Feb 27, 2009 2:46am
Quoting bobsmith

Am I missing something here?
No, you're not.
  • #4
  • Feb 27, 2009 3:25am Feb 27, 2009 3:25am
Think of Leverage as the maximum speed a car can go.


1:500 would be Ferrari, max speed is 200mph.
1:50 would be Honda, max speed is 80mph.

With Ferrari, you are can and able to go up to 200mph, but it is dangerous.

Now, if you are driving thru a crowded city street, you are not gonna drive at 200mph even if your car is capable of it.

So you are right with your OP.

For me, I wouldnt really mind what leverage the account provide. Although it might come in handy if you are 99.99999% sure that the trade is a sure win.

Think of a trade as the road condition; Choppy represents crowded city streets, and trending represents straight deserted super highway.

Hope that helps,
Why do people only post a nice trending period chart?
  • #5
  • Feb 27, 2009 4:09am Feb 27, 2009 4:09am
Quoting yuhu
Think of Leverage as the maximum speed a car can go.


1:500 would be Ferrari, max speed is 200mph.
1:50 would be Honda, max speed is 80mph.

With Ferrari, you are can and able to go up to 200mph, but it is dangerous.

Now, if you are driving thru a crowded city street, you are not gonna drive at 200mph even if your car is capable of it.

So you are right with your OP.

For me, I wouldnt really mind what leverage the account provide. Although it might come in handy if you are 99.99999% sure that the trade is a sure win.

Think of a trade...
wow...currently I am having the Ferrary(with my mini account 1:500)

but some query:

currently with account of leverage 1:500, I am able open up to lot size
started with 0.1(min allow by broker), 0.2, 0.4, 0.8, 1.6, 3.2 with $20(2000 in mini account).

0.1 = 1 cent.
if after 10 pips = 10cent.

If in standard account of $2000 (leverage1:100), can I open lots started with 0.1, 0.2, 0.4,0.8,1.6,3.2 too??

0.1 = 1 dollar (in standard 1:100)
if after 10 pips = 10 dollar.

Current results of the mini account is superb, daily $2 to 4$. Thats equivalent to 200 to 400pips daily.

if in standard account, can it be equivalent to $200 to $400??

or is it good if $2000 put in mini account = 200000
and start lotsize from 1.0, 2.0,4.0,8.0,16.0,32.0 ?

Is it the same?
  • #6
  • Feb 27, 2009 12:19pm Feb 27, 2009 12:19pm
Quoting akukaya
Current results of the mini account is superb, daily $2 to 4$. Thats equivalent to 200 to 400pips daily.

if in standard account, can it be equivalent to $200 to $400??

or is it good if $2000 put in mini account = 200000
and start lotsize from 1.0, 2.0,4.0,8.0,16.0,32.0 ?

Is it the same?
On your standard account (100:1 leverage) the margin required will be 5 times higher than on the mini account (500:1 leverage).

On the mini, the total sum of margin required for all the positions you mention is $1260 and assuming all are open, you still have 11,74 pips worth of free margin.

On the standard, the total sum of margin required would be $63000! To be at the same level as the mini, with the total pip worth $630, your account equity would have to be at least $70400 value.

Now, if you are getting $2 with 200 pips this means you are using nano-lots (0,001 and not 0,1 - 100 units - pip value $0,01) so in a standard account the equivalent to get $200 to $400 would be starting from 0.1 lots (pip value $1) to 3.2 lots (pip value $32) and the margin required $6300, account equity required $7040.
  • #7
  • Feb 27, 2009 12:38pm Feb 27, 2009 12:38pm
Are there any resources available that can explain all this in detail
Thank you
  • #8
  • Feb 27, 2009 12:43pm Feb 27, 2009 12:43pm
Quoting pipsqueesk
Are there any resources available that can explain all this in detail
Thank you
http://www.babypips.com/school/leverage_the_killer.html
  • #9
  • Feb 27, 2009 4:49pm Feb 27, 2009 4:49pm
Quoting doblece
On your standard account (100:1 leverage) the margin required will be 5 times higher than on the mini account (500:1 leverage).

On the mini, the total sum of margin required for all the positions you mention is $1260 and assuming all are open, you still have 11,74 pips worth of free margin.

On the standard, the total sum of margin required would be $63000! To be at the same level as the mini, with the total pip worth $630, your account equity would have to be at least $70400 value.

Now, if you are getting $2 with 200 pips this means you are...
but with my broker, the call my account mini account.

min lot can be open is 0.1=1 cent, with this account I cannot open 0.01lot

if i got 10 pips = 10 cent.
100 pips = 20 cent.

So with the martingale method I should go for higher leverage account.
Then if I open account with $2000 in mini account, the value is 200000.

In order to target getting $200, the lotsize should start at 1.0.

1.0/pips=10cent
100pips=$10

should it be right?
  • #10
  • Feb 27, 2009 5:03pm Feb 27, 2009 5:03pm
Quoting akukaya
but with my broker, the call my account mini account.

min lot can be open is 0.1=1 cent, with this account I cannot open 0.01lot

if i got 10 pips = 10 cent.
100 pips = 20 cent.

So with the martingale method I should go for higher leverage account.
Then if I open account with $2000 in mini account, the value is 200000.

In order to target getting $200, the lotsize should start at 1.0.

1.0/pips=10cent
100pips=$10

should it be right?
Yes some brokers call "lots" what is in fact mini or micro-lots:

standard lot (1) = $100000 (100000 units) - pip value = $10
mini lot (0,1) = $10000 (10000 units) - pip value = $1
micro-lot (0,01) = $1000 (1000 units) - pip value = $0,10
nano-lot (0,001) = $100 (100 units) - pip value = $0,01 (1 cent)

You would then be speaking of micro-lots at 10 cents a pip (what your broker calls "lots") and your actual mini-lot is in fact a nano-lot at 1 cent a pip...

As per your previous statement ($2 to $4 representing 200 to 400 pips of value = 1 cent), you would need to use a lot size that gives you $1 per pip, as with $0,10 (ten cents) per pip and same total amount you would be getting $20 to $40 and not $200 to $400... that would be 10 of your broker "lots" for starting and not 1.0. Or 0.1 lot on a standard account.
  • #11
  • Feb 27, 2009 7:04pm Feb 27, 2009 7:04pm
Quoting doblece
Leverage offered by brokers refers to the percentage of margin required on a given position.

True leverage, is what you are describing, where it will depend on how much equity there is on the account, and what percentage of it you are using on a single position, and the relationship is calculated between lots traded and account equity.

This true leverage is which is recommended to be low.

To USE 1% is not the same, though, as to RISK 1% (unless your risk is set at 100% of your position, like 100 pip stops).


Example:
Account equity $10000
Position...
Thanks for that. Cleared things up nicely.
  • #12
  • Feb 28, 2009 4:44am Feb 28, 2009 4:44am
Quoting bobsmith
Low leverage is recommended by professionals, but does it really matter the leverage you are using if you are only risking a set amount of your account? That is if I risk 1% of my capital on 1 trade, how does it make any difference if I am using 50, 100 or 400 leverage? Surely the only difference will be the amount of margin used/still available. Higher leverage allows you to enter larger trades than you otherwise could, but if you are disciplined enough to only use (eg) 1% of your capital at any one time, how does the actual amount of leverage...
Bob, you just moved to the head of the class. This is a concept most people just can't comprehend. If you trade responsibly, risk no more than a few percent per trade, and trade no more 3 trades at a time, the amount of leverage your broker offers is inconsequential. You could trade comfortably at 25:1 and never have to think about leverage again.
  • #13
  • Last Post: Feb 28, 2009 5:26am Feb 28, 2009 5:26am
Quoting philmcgrew
Bob, you just moved to the head of the class. This is a concept most people just can't comprehend. If you trade responsibly, risk no more than a few percent per trade, and trade no more 3 trades at a time, the amount of leverage your broker offers is inconsequential. You could trade comfortably at 25:1 and never have to think about leverage again.
I agree with Bob and Phil ....
You shouldn't even think about margins. Margins are nothing more than your broker offering you a loan and having you put up a little money as collateral to trade a position. All you need to worry about is:

  1. Do you have enough funds to properly trade this position?
  2. If this position is going against me, what's my exit strategy?

To many traders get hung up on numbers, percentages, 1%-2%. It doesn't matter. Leverage allows a retail trader to trade a little above his/her means. A trader should be able to trade comfortably as low as 25:1 to as high as 500:1. Margin requirements argument reminds me of a trader with a strategy that is only geared towards one timeframe. A solid trader should have a strategy that works on any timefame, whether its the 1Min chart or a Monthly chart.

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