Leverage: How do I work it out?

Hi,

I'm trying to work out what leverage is and how we work it out?

I understand the basic's of leverage i'm new to forex so the max i want to trade with on a demo / normal account is 3:1

so lets say i have £1000 2% MM = £20 which on a mirco account is £0.10 per pip so that gives us 200 pip SL to play with, but say i only wanted a 50 pip SL we then have 150 pips to play with or £15 this is where i'm stuck now... how so i work out 3:1 leverage?

it's driving me up the wall lol

If you want to use 3:1 leverage only then you can't risk 2% over 50 pips. £20 divided by 50 = 40p per pip. Therefore your position size would need to be 4 times whatever position size gives you 10p per pip; assuming 10p per pip = 1:1 leverage, your new position would require 4:1 leverage.

If you use only 3:1 leverage with a 50 pip SL, you'll be risking less than 2% of your account.

ok i'm now completed confused lol !!

Try babypips, search for leverage.

It has been discussed here many times, try searching.

Basically it is the amount of currency that the broker will allow you trade with your account size. £1000 deposit will enable you control £100,000 of the currency at 1:100 leverage, if fully leveraged. (most brokers give you this).
Basic formula for max position:
Lotsize = free margin X leverage / 100,000

You can substitute free margin for the amount you wish to risk, 2 % of £1000 = £20 (or approx $31.00)
In your example:
Lotsize = $31 X 100 / $100,000 = 0.03 or 3 micro lots

This deposit will be your margin that the broker will put aside from your account, if you win your free margin will increase, if you lose your free margin will decrease until you have No free margin when the broker will give you a margin call.

A simple to use calculator is here:

http://www.earnforex.com/position-size-calculator

Dont ever, ever, ever, ever...... trade more than 1/10 leverage, if your account is large enough then trade leverage 1/1. As a newbie if you dont heed this advise your account is going to be wiped out very, very, very, very soon.

FIRST Determine your stop in pips,
SECOND determine your position size based on percent risk and
THIRD see what your resultant leverage is. If the resultant leverage is too high, then lower your percent risk for the given stop size.


Account Size = $1000
Percent Risk = 2%
Amount Risked = $1000*.02 = $20
Stop size = 50 pips
Pip value = .10 (10 cents on a micro account)
Total pip value = 50 pip stop * .10 = $5.00
Position size = $20/$5 = 4 micro lots
Resultant pip value = .4 (40 cents per pip)
Resultant leverage = $4000 position size / $1000 account size = 4:1

Hi,

Thanks for your replies, sorry to sound completely newbie and thick!

but could someone do the same sums $1000 2% risk MM but with a 3:1 leverage and not 4:1, I'm trying to get my head around this but at the moment I'm finding it hard

If $0.10 per pip gives you a 200-pip stoploss, then $0.40 per pip gives you a 50-pip stoploss (sorry, I don't have a Sterling symbol).

200/4=50
0.10*4=0.40

Is that what you're asking?

Do you absolutely have to use 3:1 leverage? In a $1000 account, 3:1 leverage is $3000, or $0.30 per pip.

If your risk is $20 and you want 3:1 leverage, your stoploss will be 67 pips (20/0.30=66.6666~).

If you absolutely want to risk $20 with a 50-pip stoploss, then your position size will use 4:1 leverage, or $0.40 per pip (20/50=0.40).

If you absolutely want a 50-pip stoploss with 3:1 leverage, then your risk will be $150 (50/0.30=150).

Here it is worked out for you:
The example here shows you can trade max 62cents per pip, (0.62 micro lots) or 40 GBP pence per pip, risking $31 or £20 with 50 pip stop loss. Amounts vary as currency rate between GBP & USD will vary, that is why you need this calculator.
Your leverage here is approx 1:4 as you have increased your initial deposit by 4 fold, purchasing approx £4000 ($6200) worth of currency with £1000. I hope you get this. It's the currency conversion confuses most people.

with a 3:1 leverage u can buy max. 3000 units !


please read the followin article (2 parts)

http://www.goforex.net/forex-leverage.htm

If you want to only trade with a maximum of 1:3 then you would take your balance eg. $1,000 and multiply that by 3 and that is the maximum position size you can take, so a $1,000 balance will allow you a position size of $3,000, a $10,000 position size is 1 minilot or $1 per pip so roughly 30 cents per pip or 0.3 minilots, that is your leverage, then you would have a maximum stop loss of whatever you want to risk, so if you wanted to risk 2% of your account that would give you $20 to play with which at 30 cents maximum per pip is a 66 pip stop loss, or you could trade at less than that if you wanted a bigger stop loss. That is the way you work it out.

So the easy way to do it is find out the maximum position size you can put in, then work out your 2% depending on your stop loss and if its more than the maximum position size (in the above example 0.3 minilots or 30 cents) take it down to that.