Leverage, Loss & Account Balance | Forex Factory

Options

Permalinks
Print Thread

Similar Threads

High leverage vs Low leverage 74 replies

ECN && STP && Scalping && Hedging - Broker Review - Oct 2009 24 replies

High Leverage vs Low Leverage 21 replies

High Leverage vs Low Leverage 20 replies

Progressive lots sizing based on account balance and tracking balance 3 replies

Leverage, Loss & Account Balance

  • #1
  • First Post: Jun 30, 2011 10:55pm Jun 30, 2011 10:55pm
Hi folks,

I came across the question below on another forum and I realized that I did not have a clear answer. Whoever has a clear response to this then please enlighten us.

Here is the question:

Quote
Can u show me how is higher leverage "no good" in the event of a losing trade? e.g. Two traders have the same initial account balance, open the same trade (same currency pair)with same trade size (i.e. same no. of lots). Only difference is Trader A uses 50:1 leverage and Trader B uses 200:1 leverage. Let's say the trade is in loss by 60 pips, how does it affect the account balance of each trader? Thanks for your advice.

And I would like to add this to the question: are there any online/offline calculators that can clearly prove/demonstrate the answer to this question?

Thanks and I'm looking forward to the responses.
  • #2
  • Jun 30, 2011 11:12pm Jun 30, 2011 11:12pm
Quoting global3
Hi folks,

I came across the question below on another forum and I realized that I did not have a clear answer. Whoever has a clear response to this then please enlighten us.

Here is the question:

Thanks and I'm looking forward to the responses.
Their balance will equal but their margin used on the trade will be different, Trader B with higher leverage (over-leveraged) will use less margin per trade than the other trader.

Because of this, Trader B could place more orders or use larger lot sizes than Trader A even when they have the same size accounts.

Whilst this may sound good, it's not always because although it allows Trader B to open more trades with bigger lots, he can also severely damage his account balance very quickly if he hits a losing streak since he's over traded for the size of his account.

Regard, Paul.
  • #3
  • Jul 1, 2011 12:45am Jul 1, 2011 12:45am
Thank you for your response. So basically the higher leveraged account may tempt the trader to greedily risk a larger % of his/her account balance by trading more lots and that may result in a very large % loss after a few consecutive losses as show in the table on this page:
Inserted Code
http://www.forex-money-management.com/
That's why 1-2% is recommended to minimize losses.

So for a trader that chooses to trade a fixed % of his account balance, the $ value of a profit/loss of x number of pips is only dependent on the trader's risk % that is set by the stop loss and the number of lots traded. Therefore, leverage has absolutely no effect on the profit or loss of trades as shown in this spreadsheet:
Inserted Code
http://www.forex-money-management.com/TmmForexIncomeCalculator.xls
I'm asking about this spreadsheet just to confirm whether or not it is showing accurate profit projections. I initially thought that leverage was not factored into the calculations but I was wrong since leverage has no effect on the profit/loss value. If the spreadsheet calculations are accurate, then starting with only an account balance of $1000, trading with $1000 (micro) lot sizes, risking only 2% of your account balance on each trade, with an average stop loss of 50pips and using a trading strategy that consistently achieves an average of 50pips per day in profit, then that $1000 will grow to over $100,000 in one trading year. But if you start with $10,000 then you can grow your account balance to over $100,000 in only 6 months. Does this seem realistic enough and doable to the experienced traders here?

Regards,
Peter
  • #4
  • Jul 1, 2011 1:20am Jul 1, 2011 1:20am
Quoting global3
So for a trader that chooses to trade a fixed % of his account balance, the $ value of a profit/loss of x number of pips is only dependent on the trader's risk % that is set by the stop loss and the number of lots traded. Therefore, leverage has absolutely no effect on the profit or loss of trades as shown in this spreadsheet:
Inserted Code
http://www.forex-money-management.com/TmmForexIncomeCalculator.xls
I'm asking about this spreadsheet just to confirm whether or not it is showing accurate profit projections. I initially thought that leverage was...
As far as I can see, the sheet shows your $1K account would grow to $6K after 12 months and $10K would grow to $25K after 6 months. Don't forget that the micro lot sizes are only worth 10 cents/pip not $10

Whilst it looks good in the spreadsheet, the main problem is earning 20 pips per day, every day, especially with a relatively small account balance.

One way to increase the balance dramatically quickly is to compound your profits by increasing the % risked as you go along. However, this is risky if you hit a losing streak. If you were guaranteed to be able to win every trade you can theoretically turn $100 into $1M within a matter of weeks.

Earning 20 pips per day every single day is not as easy as it sounds. Also, the spreadsheet is based on trading 7 days per week which gets really difficult when the market's closed at weekends

If it was this easy, everyone would be doing it.

Regards, Paul.
  • #5
  • Jul 1, 2011 1:33am Jul 1, 2011 1:33am
On the contrary, the spreadsheet is based on a 5day week, 20day month and 240 day trading year so no weekends are taken into account. Also my profit projection scenario with the spreadsheet was based on a 50pip per day average profit which I understand is not all that easy to achieve but I think that it is possible.
  • #6
  • Jul 1, 2011 1:41am Jul 1, 2011 1:41am
Quoting global3
On the contrary, the spreadsheet is based on a 5day week, 20day month and 240 day trading year so no weekends are taken into account. Also my profit projection scenario with the spreadsheet was based on a 50pip per day average profit which I understand is not all that easy to achieve but I think that it is possible.
I misread the sheet, it is a 5 day week and I missed you mentioning it was 50 pips per day.
  • #7
  • Jul 1, 2011 2:37am Jul 1, 2011 2:37am
Hi,

Maybe the person who was asking the question (in the first post) was thinking about trading without a stop loss
Correct me if I am wrong but I think that the account leveraged 1:50 will be stopped out on a margin call earlier than the 1:200 account because the margin secured for the open position will be larger in the first case.
Is that right or am I confused?

I guess the main reason for the highly leveraged accounts is to make it easier for the rookies to go bankrupt quickly and without fuss but I imagine there might be uses of high leverage for experienced and well to do trader.
For example if you trade for a living and trade quite big and your risk per trade is 2% of your trading capital, why keep all this money on your broker's account if you can deposit only a fraction of it and still be able to open big enough positions thanks to high leverage.
  • #8
  • Last Post: Jul 1, 2011 12:28pm Jul 1, 2011 12:28pm
All this is further clarified in the Information For Beginners thread.

As you read the thread, pay particularly close attention to the money management posts 18 thru 33. For your convenience, the link above goes directly to post #18. Those posts are the best explanations I've come across so far on money management.

Plus this thread covers all the other newbie question that come up:

Help for Newbies. What can you learn on Forex Factory?

This forex forum is undoubtedly the best of the best.
0 traders viewing now