Leverage in relation to risk | Forex Factory

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Leverage in relation to risk

  • #1
  • First Post: Edited 10:52pm Apr 13, 2012 10:31pm | Edited 10:52pm
If you have a fixed risk at 2% a trade, does it really matter what your leverage is?

All that would change is the amount of margin used, and I guess would allow you to have more open trades at once.

Let me know if I am missing anything or if I am completely wrong.
  • #2
  • Apr 14, 2012 1:38am Apr 14, 2012 1:38am
Quoting VBFlyin

If you have a fixed risk at 2% a trade, does it really matter what your leverage is?

All that would change is the amount of margin used, and I guess would allow you to have more open trades at once.

Let me know if I am missing anything or if I am completely wrong.
Exactly right, and it's surprising just how many people don't understand it!
  • #3
  • Apr 14, 2012 8:19pm Apr 14, 2012 8:19pm
Never feel like you are required to use all your leverage!
  • #4
  • Apr 15, 2012 7:40am Apr 15, 2012 7:40am
Quoting VBFlyin
If you have a fixed risk at 2% a trade, does it really matter what your leverage is?

All that would change is the amount of margin used, and I guess would allow you to have more open trades at once.

Let me know if I am missing anything or if I am completely wrong.
I feel that this is wrong, your risk per trade means the mount you are willing to lose on that particular trade.

Your leverage will allow you to make trades of different sizes, for example let us assume you have $1000 in your account, 2% of this is $20. Now if you trade a standard lot ($100,000) then that means that you are using a leverage of 1:100 and thus every pip whether up or down will be $10. So as per your risk management rule your stop loss has to be 2 pips below your entry price and this is quite tight.

However, if you trade a minilot ($10,000) then you will be using a leverage of 1:10 and your price per pip will be $1 so you can have a stop loss of up to 20pips,

So in hindsight, leverage will indirectly affect your trading plan, infact most people say that leverage is something new traders should be very careful of as it may wipe out accounts in minutes.

Cheers
Abi
An investment in knowledge pays the best interest - Ben Franklin
  • #5
  • Apr 15, 2012 8:32am Apr 15, 2012 8:32am
Quoting abi2712

I feel that this is wrong......

.....leverage will indirectly affect your trading plan
Leverage offered by a brøker only affects margin requirement (and margin call), exactly as the OP stated.

In context leverage offered and leverage actually used are both really an unnecessary calculation if you think about it.

Do a little test calculation, one brøker who offers 50:1 and another offering 500:1. 2% risk on a 10k account with a 50 pip stop on Eur/Usd. $4 per pip, trade size 40k. 50:1 or 500:1 the result is the same, we don't need to know how much leverage we used or even what our margin requirement was. If we sail too close to the wind and need to worry about available margin then maybe it's time to rethink our money management plan!
  • #6
  • Last Post: Apr 20, 2012 3:35am Apr 20, 2012 3:35am
Quoting VBFlyin
If you have a fixed risk at 2% a trade, does it really matter what your leverage is?

All that would change is the amount of margin used, and I guess would allow you to have more open trades at once.

Let me know if I am missing anything or if I am completely wrong.
Assuming perfect execution yes.

But picture this:
risking 2% on a 200pip stop loss that gets filled in a violent move 10 pips away would mean a 2.1% loss

risking 2% on a 5 pip stop loss that gets filled in violent move 10 pips away would mean a 6% loss.

There is no such thing as guaranteed stops unless you are trading very small, so leverage also plays a role in your risk management.
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