Question : is this a paradox?

You are right.

Thats what i am trying to explain here ...
Its never true leverage of 1:1 unless the pair value is 1.000 and will relatively the leverage keeps shifting once the pair value changes above or below1.00.... unless you add or reduce the position value with the change in the pair value.

SUM IT UP THIS ISSUE:

I will add all explaination in one post:


To clear up all issues here and very valid ones by all means ,

i would like to point out the leverage of 1:1 i.e. no leverage is applicable only when the account is in the denominator currency of the pair .

Thus if the account would have been in CHF the leverage would have been 1:1 .

In case of the USD acct its 1:2 .

Thus 5000 pips loss on usd acct would be leverage of 1:2 and thus complete wipe out.
and 5000 pips loss on chf acct would be 1:1 and loss of half capital .

In other words DENOMINATOR CURRENCY IS USED IN CALCULATION OF LEVERAGE.


To add further ,

the true leverage would only and only be calculated when trading pairs with the denominator base account and round up value of pair is in the ratio of 1:1 which doesnt apply to any pair holding as true leverage and all are rounded up to nearby value hence making majors in the round up relative leverage of 1:1.

Since eur/usd = 1.25 and not 1:1

aud/usd = 1:06 which is relatively closer to 1:1 . Thus relative leverage and not true leverage.

Thus larger trading houses and funds have offices in all the majorly traded currency countries and have accounts in relative currencies so as to avoid this confusion and use relative leverage of 1:1 basing on the denominator currency.

Its never true leverage of 1:1 unless the pair value is 1.000 and will relatively the leverage keeps shifting once the pair value changes above or below1.00.... unless you add or reduce the position value with the change in the pair value.

Exactly what I've settled on so far...

I'm just trying to figure out the exact equation for that relationship in leverage change to price...

.... I'm probably going to wake up tomorrow feeling well rested and half over this cold and think this entire thing was just silly to spend so much time dwelling on (ultimately it matters not for my type of trading.) But it's something that caught me off guard earlier and thus I found it interesting enough to dive into.

Leverage is not constant throughout the lifetime of your trade. As your loss gets bigger, your equity goes down. Please note that it is account equity (balance + unrealized P/L) that I'm using to calculate leverage.

The best way to deal with basic issues like this is to take it all the way from the basics (surprise):

What happens, in simplified theory, when you buy 10,000 units of USD/CHF, when you have a USD denominated account?

 

1. You need to borrow USD10,000 worth of CHF, which at the current rate of 1.0000 is CHF10,000.
2. Using your borrowed CHF, you buy USD10,000
3. USD/CHF rate goes down to 0.5000
4. You still own USD10,000, but if you want to close your trade, you have to sell the USD and return the CHF10,000 loan you took out to pay for the USD when you opened your trade.
5. Unfortunately, your USD10,000 only buys you CHF5,000 at the current rate, so you are short another CHF5,000 and need to pay it out of your account balance.
6. In order to repay the CHF5,000 remaining loan balance, you need to sell another USD10,000 (this time from your account balance, or margin) at the current rate of 0.5000.
7. Since your total margin was USD10,000, your account is now empty. Please come again.

This calculation is basically done for you by your trading platform for every pip that the market moves, and the total reflected in your account equity (not your balance, since it is just a paper loss until you decide to bite the bullet, or run out of margin).

Hope that helps.

You guys have no idea how silly I feel!

I "got" the theory behind how it changes, but I kept wondering how I could model out the change on position sizes over the long term... then it just *clicked* when I related it back to equities and stock position size vs stock value and % change (I work on an equities desk during the day for a firm, so relating it to my work got an instant "light bulb" moment out of me.)

Like buying a 100 share lot of a stock at a given price. If the price goes up by 10x, your 100 shares is going to affect your total position's return by a huge amount every time the stock itself goes up a 1% in a day. It's about relative value as converted from a denominating unit of measure.

Not sure I quite follow the equities analogy, but another way to think about it is that your USD position is losing half of its value, and your USD account balance is also losing half of its value, compared to CHF. So you are losing $5,000 on your position, and your are losing $5,000 because your account balance is losing value, and it becomes that much more expensive for you to repay your CHF loan with your USD account.

Yes fierceman, I got what you are trying to say.
But isn't it seems paradoxically when you lose all of your money holding on a currency which hasn't lose all of its value? It just like you are buying a house worth 10 mil with caah and when the market crashed you are left nothing, even you are not selling your house. Do you spot what is strange

Yes, it can appear a bit counter-intuitive at first glance. I would definitely recommend looking at all trades using the steps I outlined above, until you really get a feel for it. I would use the analogy of a sailor learning to use celestial navigation techniques and nautical charts, despite the fact that GPS is widely available. I think it's always a good idea to understand the basics of the business you're in, even if you don't use that knowledge directly in your day to day activities.