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Managing your Money : Leverage

  • #1
  • First Post: May 23, 2011 7:41am May 23, 2011 7:41am
Hi All you Forex Traders! Proper money management is the key difference between a professional trader and an amateur; therefore, the following article is a guide how to manage your money. A key for money management is leverage.

What exactly is leverage? Most of the Forex Brokers give clients the option to open trades with larger sizes than the trader can actually affords. For example, a trader with a balance of $10,000 can open a position with a max size of 1M=> 100 X 10,000 = 1,000,000 (1:100 is a standard leverage). The leverage is necessary in forex trading since prices are moving just by a pip at a time, so you have to trade high volumes in order to gain significant money. However, it is important to note that leverage can just as easily harm a trader as it can help him. The ability to open huge sizes tempts many traders and converts trading to gambling. Therefore, a trader should set a limit of the leverage he/she uses, in order to monitor the risks.

Unfortunately, There is no perfect answer for the question: "what is an appropriate leverage?", because it varies from each trader. Nonetheless, a beginner should leverage his trades at no more than 1:10. This level of leverage means that it takes about a 10% decline of a trade, before the stop out; while still being high enough to earn decent money.

Good Luck and Happy Trading
  • #2
  • May 23, 2011 8:18am May 23, 2011 8:18am
Nice post. It is often incorrectly thought by many traders, mainly inexperienced, that higher leverage is safer for a beginner. Of course this is not true. High leverage should be used only by experienced traders whom can use it to increase their profit. However, I know several professional traders and even they prefer to use lower leverage.
  • #3
  • May 23, 2011 8:55am May 23, 2011 8:55am
Your definition of Money Management is rudimentary at best, If you want to know more and really get a handle on this subject I would suggest you read K. Van Tharp's book, Definitive Guide to Position Sizing.
  • #4
  • May 24, 2011 5:42am May 24, 2011 5:42am
Quoting ChrisJMan
Unfortunately, There is no perfect answer for the question: "what is an appropriate leverage?", because it varies from each trader. Nonetheless, a beginner should leverage his trades at no more than 1:10. This level of leverage means that it takes about a 10% decline of a trade, before the stop out; while still being high enough to earn decent money.
I think you might be confusing leverage and risk.

If I have a 100 pip SL trading 0.1 lots EURUSD then my risk is $100. If I trade 0.2 lots the risk is $200, and so on. None of this has anything to do with leverage. My br0ker might be offering 10:1 or 50:1 or 200:1 leverage, but this does not alter the risk that's involved.

Leverage only becomes an issue if I don't have enough free margin in my account to make a trade.
  • #5
  • May 24, 2011 6:00am May 24, 2011 6:00am
hey friends, then what is the advised leverage level for one who trades with 656usd
  • #6
  • May 27, 2011 5:26am May 27, 2011 5:26am
Quoting kingmikefide
hey friends, then what is the advised leverage level for one who trades with 656usd
It all depends on your style of trade. It should be structured in a way that allows your positions to suffer forced liquidation without your bank depreciating more than 10% (and I suffer 1-3 of these per 20 sessions, while it takes 1-2 sessions bring bank back to break-even)

Ok, short answer. I personally use 40:1 hard cap on account and maximum 35:1 on open positions because I agressively rescue(average to B-E point) bad positions.

Like I said, it all depends on your style of trade. If you're the type that always bites the bullet, then 10:1 hard cap is best.
Request that your broker modify your leverage according to your needs. If they can't then take your business somewhere else. Do not fall for the trap of 100:1 / 200:1 / 400:1 shark. Even what I use is dangerous if not managed properly.
"The biggest risk (in trading) is not knowing what you're doing"

Take care
  • #7
  • May 27, 2011 5:31am May 27, 2011 5:31am
I would go with 1:1 in the beginning. But like the others here said, it depends on your trading style. Mine is very long term without stops and I usually go for 0.1:1 up to 1:1 per entry.
  • #8
  • May 27, 2011 9:44am May 27, 2011 9:44am
New traders, please read Hanover's post. Leverage isn't how you control your risk , it just limits the amount of money you can control at one time. You control your risk by position sizing.

Earnforex.com has a free position size calculator so you can make sure to risk a fixed amount (1% or less is usually good) of your account on each trade.

Hope this is helpful.

Cory
  • #9
  • May 27, 2011 5:53pm May 27, 2011 5:53pm
Quoting Cbh123
New traders, please read Hanover's post. Leverage isn't how you control your risk , it just limits the amount of money you can control at one time. You control your risk by position sizing.

Earnforex.com has a free position size calculator so you can make sure to risk a fixed amount (1% or less is usually good) of your account on each trade.

Hope this is helpful.

Cory
To me leverage IS part of risk management. Risk management part of Money management. Money management part of Position management. I have structured leverage in such a way that it prevents me from entering a death spiral (Sort of like a circuit breaker).
For me suffering a margin call is not a biggie. It is a signal for me to restructure my MM according to prevailing capital levels, take a breather and come back the next day knowing that I suffered defeat but only lost a day's worth of gains.
It helps me rescue bad positions with ease, knowing that there's a back-bone for when my mindset is out of tune. For me, that is risk management.
A trader's mind is stubborn because of greed.
Leverage is the best teacher- Use this teacher to your advantage, not to your peril.
  • #10
  • May 27, 2011 6:11pm May 27, 2011 6:11pm
Quoting Cbh123
New traders, please read Hanover's post. Leverage isn't how you control your risk , it just limits the amount of money you can control at one time. You control your risk by position sizing.

Earnforex.com has a free position size calculator so you can make sure to risk a fixed amount (1% or less is usually good) of your account on each trade.

Hope this is helpful.

Cory
And by sizing your position to 1% of your capital does not really mean that your only risking 1%, As 99% of your capital is at risk as floating margin (assuming you're using 100:1 leverage). I suggest you find a better method of quantifying/ managing your risk. Do remember that no one size fits all. So it will depend on your trading style.

Take care
  • #11
  • May 28, 2011 1:33am May 28, 2011 1:33am
Quoting momento
And by sizing your position to 1% of your capital does not really mean that your only risking 1%, As 99% of your capital is at risk as floating margin (assuming you're using 100:1 leverage). I suggest you find a better method of quantifying/ managing your risk. Do remember that no one size fits all. So it will depend on your trading style.

Take care
I never take floating margin into account. I base my position size on account balance.

I guess though to do it properly I should deduct the value of any open trades should the worst case happen and they all make a loss.

Luckily this hasn't been a problem in 3 years
  • #12
  • May 28, 2011 1:05pm May 28, 2011 1:05pm
Quoting hanover
I think you might be confusing leverage and risk.

If I have a 100 pip SL trading 0.1 lots EURUSD then my risk is $100. If I trade 0.2 lots the risk is $200, and so on. None of this has anything to do with leverage. My br0ker might be offering 10:1 or 50:1 or 200:1 leverage, but this does not alter the risk that's involved.

Leverage only becomes an issue if I don't have enough free margin in my account to make a trade.
I do agree with you. In spite of the leverage you trade with the risk is the same - you can lose all the funds deposited to your account. the only thing which matters is how much free money there is on your account.

Why does everyone believe that the less leverage you trade with the less you risk?
  • #13
  • Jun 11, 2011 12:35pm Jun 11, 2011 12:35pm
Hi people, now i somehow understand what volume,margin and leverage mean. I just want someone to straighten this up for me.
I am trading with FXPro, they give a leverage upto 1:500.
I deposit $3000 on to my account, use 0.1 mini lots @ 1.3900 EURUSD, and a leverage of 1:500(500*10,000=$5M to play with).

If i wanted to use not more than $200, for every trade i enter, would i need to change my leverage, and if so, to what? or i would just have to add a SL of $200.

Please if possible,illustrate with some maths. thanks.
  • #14
  • Jun 11, 2011 3:00pm Jun 11, 2011 3:00pm
On the other hand. who understands the FXPro-MT4 platform leverages? Am confused. they are represented in this format: 1:1, 1:10,1:100 upto 1:500.
Qtn: Is 1:500 the same as 5:1 in other platforms?
  • #15
  • Jun 11, 2011 3:44pm Jun 11, 2011 3:44pm
Quoting square1
Hi people, now i somehow understand what volume,margin and leverage mean. I just want someone to straighten this up for me.
I am trading with FXPro, they give a leverage upto 1:500.
I deposit $3000 on to my account, use 0.1 mini lots @ 1.3900 EURUSD, and a leverage of 1:500(500*10,000=$5M to play with).

If i wanted to use not more than $200, for every trade i enter, would i need to change my leverage, and if so, to what? or i would just have to add a SL of $200.

Please if possible,illustrate with some maths. thanks.
You probably don't need to change leverage. Just remember that a lot equals $10 per pip, a mini lot equals $1 per pip, and a micro lot equals $.1 per pip.

If you want to set a SL at 100 pips, and you want to risk $200, this means you should trade with .2 lots (= 2 mini lots.)

Since .2 lots equals $20.000, it doesn't matter whether your broker offers 1:500 leverage, or 1:10 (assuming your $3k account). If you want to risk $200 with a smaller SL, the high leverage your broker offers may become a necessity, as shown below.

With an SL of 10 pips, and a value at risk of $200, this implies trading 2 lots. 2 lots equals $200k, or a utility of 1:67 leverage on a $3k account.

All in all, forget about leverage unless you're thinking about scalping.
The nail that sticks out gets hammered back in
  • #16
  • Jun 12, 2011 5:45pm Jun 12, 2011 5:45pm
Ok. thanks for all the writeup. it sunk in my mind. Here is a situation i need help with.
I go to FxPro-MT4, create a demo account,the funny thing is that when you are creating an account on the platform, there pops up a dialog form where there are different parameters to feed in. Among these parameters, there lies LEVERAGE(this coming 'first' contravenes with what sunk in my head from this thread) and amount size.

Ok. I create an account with
Leverage: 1:5.
Amount Size: $3,000

Then i popup the GBPUSD chart window, populate it with my prefered indicators. I realise that the trend is bullish and my stochastic is in the overbought territory, so i make a sell(short) order @ 1.62413.

My parameters are.
Symbol: GBPUSD, British Pound Vs USD
Volume: 0.1 (which i think represents a micro lot case)
Stop Loss: 1.62443 (which i think is 30pips above the bid price)
Take Profit:0.00000

When i press Sell, it tells me Invalid SL or TP.
I tried to change the leverage to 1:500 and repeated the same procedure but i get the same answer. Help me, what am i getting wrong? was my stop loss of 30pips supposed to be represented as 1.62713? am saying this because a micro lot is 1,000 units.
  • #17
  • Jun 12, 2011 6:26pm Jun 12, 2011 6:26pm
Quoting square1
Ok. thanks for all the writeup. it sunk in my mind. Here is a situation i need help with.
I go to FxPro-MT4, create a demo account,the funny thing is that when you are creating an account on the platform, there pops up a dialog form where there are different parameters to feed in. Among these parameters, there lies LEVERAGE(this coming 'first' contravenes with what sunk in my head from this thread) and amount size.

Ok. I create an account with
Leverage: 1:5.
Amount Size: $3,000

Then i popup the GBPUSD chart window, populate it with my...
stop losses and take profit needs to be at least 10 pips away. In this case your order at 1.62413 with stop loss at 1.62443 is only 3 pips away. A general rule of thumb is that 1 pip = 0.0001 not 0.00001
  • #18
  • Edited 6:43pm Jun 12, 2011 6:34pm | Edited 6:43pm
Quoting biDc
stop losses and take profit needs to be at least 10 pips away. In this case your order at 1.62413 with stop loss at 1.62443 is only 3 pips away. A general rule of thumb is that 1 pip = 0.0001 not 0.00001
thanks for this, so a stop loss at 30pips would be at 1.62713, Correct?
Pardon me, I also wonder, does that represent all contract sizes? i mean 1 lot, 1 minilot, 1micro etc?
  • #19
  • Jun 12, 2011 7:27pm Jun 12, 2011 7:27pm
Quoting square1
thanks for this, so a stop loss at 30pips would be at 1.62713, Correct?
Pardon me, I also wonder, does that represent all contract sizes? i mean 1 lot, 1 minilot, 1micro etc?
Correct for the first one.

As for the second question, yes it represents all contract in that 1pip = 0.0001. It's just different contract sizes = different ($) value per pip.
  • #20
  • Jun 12, 2011 7:27pm Jun 12, 2011 7:27pm
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Regards to all!

Good business and good pips!
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