Reasonable leverage | Forex Factory

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Reasonable leverage

  • #1
  • First Post: Jul 12, 2011 11:23pm Jul 12, 2011 11:23pm
Traders mostly chase for high leverages.
In my opinion leverages save accounts too likewise and destroy them.
I think reasonable leverage for me is 1:200
What is your reasonable leverage?
  • #2
  • Jul 13, 2011 3:39am Jul 13, 2011 3:39am
1:10
  • #3
  • Jul 13, 2011 4:48am Jul 13, 2011 4:48am
1:10

or 10:1

However you want to write it. You will eventually learn (like I did), to not expose more of your account to LOSES. 10:1 is more than enough.

Now think about wins and loses in percentages. Only making 2% a MONTH will put you in the ELITE of all traders.
  • #4
  • Jul 13, 2011 7:09am Jul 13, 2011 7:09am
Quoting Expert44
Traders mostly chase for high leverages.
In my opinion leverages save accounts too likewise and destroy them.
I think reasonable leverage for me is 1:200
What is your reasonable leverage?
are you joking?

1:200 leverage.. if your using it all...

lets just put it this way

risking 2% per trade with 15 consecutive loses is equivalent to losing 30% of your account

risking 5% per trade with 15 consecutive loses is equivalent to losing 50% of your account


it takes a 100% gain to make up for a 50% loss


and 15 consecutive loses WILL HAPPEN by the law of probability even with a 70% win rate.. actually if your trade a lot per day than you can expect way higher than 15 consecutive loses


just saying....


I could understand need 1:200 leverage if you trade with a stoploss at a few fractions of a pip.. aiming for a return of a few fractions of a pip (super micro scalping) but I'm guessing this is not your case
  • #5
  • Jul 13, 2011 11:29am Jul 13, 2011 11:29am
Well, if you trade H1, you need bigger swings.
Those who trade M1/M5 sitting non stop at the computer
they might use 1:10.
I do not get why 1:500 is needed? Who puts crazy stop loss he is
actually gambling, not trading.
  • #6
  • Jul 13, 2011 12:14pm Jul 13, 2011 12:14pm
I believe that most people confuse the different types of leverage.

As an example, say you have $10,000 of equity and that you trade 1% risk and your broker leverage is 100:1.

Then you risk $100 per trade. For ease let us say that you have a 50 pip stoploss. Therefore you are trading $2 per pip or 0.2 lots or $20,000 size. Now as the broker leverage is 100:1 you will need $200 margin on account with the broker.


As you have $10,000 equity total this is not a problem. The way to use the broker leverage to your advantage is to only deposit 10%-20% of your total equity with him. The rest you keep in a liquid investment at your bank. This is to decrease broker risk.

So in this case you deposit $2000 with your broker and the remaining $8000 is left in your bank account. You trade 1% of your total equity not just 1% of what is on deposit with the broker.

As for what leverage you are using it is $20,000/$10,000 or 2:1. You may believe that it is 100:1 but that is just margin required on account at your broker prior to a trade. in this example with $2000 on deposit you could easily have 5 same size trades outstanding and still only use 50% of your margin.

The proper use of broker leverage is to use it for nothing more then to lower the amount required to be on deposit at your broker. To that extent there is nothing wrong with 500:1 broker leverage. It does not matter what broker leverage is as it applies to your overall leverage or risk.

The problem comes when people abuse broker leverage and actually trade with a true leverage of 100:1 or worse.

i concur with using a true leverage of 10:1 or less. It is how I trade.

So why do brokers provide such high leverage. usually it is a broker who is taking the other side of the trade against you. the trade never leaves his shop and his risk is small. By providing you with such large leverage he is hoping that you will overtrade, overcommit and blow your account. In fact he is betting on it.
  • #7
  • Jul 13, 2011 12:25pm Jul 13, 2011 12:25pm
Broker wins in any way. As you said 1:500 favors him, not a trader. On the other side too small leverage limits freedom of trading by forced closing of position. I think 50 pips stop loss is more than enough....
  • #8
  • Jul 13, 2011 12:41pm Jul 13, 2011 12:41pm
Quoting Expert44
Broker wins in any way. As you said 1:500 favors him, not a trader. On the other side too small leverage limits freedom of trading by forced closing of position. I think 50 pips stop loss is more than enough....
The size of the SL has no bearing on the discussion of leverage. Your risk is your risk. How many pips you spread your risk across is what your SL is.

If you are trading %R style instead of a fixed lot style then SL size is immaterial to leverage. however, i do realize that some people trade a fixed lot style no matter what. In that style they trade 1 lot (an example only) no matter what. If their Sl is 10 pips or 100 pips they trade 1 lot. In that case it can matter greatly as they are indeed increasing their risk by a factor of 10.

I determine my risk as always 1% of equity. Then I take the last swing low/high and measure the pips to that point. From that i calculate my position size. No matter what my risk is 1%.

I responded to the original question based on my experience of using %R as a position sizing method. In which case my comments ring true as to broker leverage vs true leverage. For those who use a fixed lot style then broker leverage can blow an account really fast.

as for 50 pip SL being enough...only TF and swing low/high can determine that. On H4 it may be 200 pips, on D1 300 pips, 15M it may be 25 pips. I don't have a predetermined SL.

But everyone trades their own style and what works for some may not work for others. My style works for me. Your style works for you.

A lot of times when responding to these discussions I have found people at odds for the simple fact that their trading styles are different. As your style is different from mine you will find that you disagree with me. That does not make either one of us right. It just makes us different.
  • #9
  • Jul 13, 2011 5:17pm Jul 13, 2011 5:17pm
For me, when I become a real trader, with good strategy, confidence, experience and above all discipline, I will have nothing against a leverage of 1:1000 or even more (I know it's academic).
Why keep more money on my broker's account than I actually need. I can always deposit more if I have too much of a draw-down.

Right now I am still learning the basics. I trade microlots. I have a trading account with 1:500 leverage. I risk 10 to 15% of my deposit on each trade, which amounts to about 0,1 to 0,15% of my current trading capital.
Psychology aside, why would I want to have a much lower leverage on my account and be forced to keep a much larger fraction of my trading capital on my broker's account? Right now my full exposure in case of some catastrophic event (I open a position and get a heart attack before I can set my stop loss and the price goes against my position) i can lose less than 1% of my trading capital if i get stopped out by broker. Why would i want to raise that risk? Where's the benefit? Once again: give me an answer, without going into trader's psychology. Let's assume I am already an experienced trader without overtrading and/or overexposure issues.
  • #10
  • Jul 13, 2011 5:51pm Jul 13, 2011 5:51pm
Quoting Giansar
Why would i want to raise that risk? Where's the benefit? Once again: give me an answer, without going into trader's psychology. Let's assume I am already an experienced trader without overtrading and/or overexposure issues.

Who are you directing this question to?
  • #11
  • Oct 7, 2012 2:30am Oct 7, 2012 2:30am
It depends on the time horizon of your trading. If you're a long-term trader, you should not use a leverage higher than 1:20. Most long-term traders use leverages less than or equal to 1:10.

But if you're a short-term trader (day trader or scalper), a large leverage (1:100 or greater) is okay.

If you are a risk-averse trader, use a low leverage. If you are risk loving and can handle a big loss, you can go with a high leverage. Most successful, professional traders use a low leverage, by the way.
  • #12
  • Oct 7, 2012 8:16am Oct 7, 2012 8:16am
There is no "right" number...it all depends on your win rate and account size.

Using those figures you can calculate your risk of ruin. Of course the win rate is an estimate, and only a good estimate if your sample size is large enough.

It's actually quite similar to how professional poker players decide what stakes they can play.
  • #13
  • Oct 7, 2012 9:35am Oct 7, 2012 9:35am
Quoting Expert44
Traders mostly chase for high leverages.
In my opinion leverages save accounts too likewise and destroy them.
I think reasonable leverage for me is 1:200
What is your reasonable leverage?
Leverage does not kill or save accounts. It is YOU, the trader, the kills or saves a trading account. My accounts in Pepperstone (see my trade explorer) have 400 leverage, but I never use them all.
Fear prevent possibilities, and so does Greed
  • #14
  • Oct 7, 2012 5:09pm Oct 7, 2012 5:09pm
Quoting newyear498
and 15 consecutive loses WILL HAPPEN by the law of probability even with a 70% win rate.. actually if your trade a lot per day than you can expect way higher than 15 consecutive loses
Actually, the statistical probability says that if you have a 70% win ratio system, then the max number of sequential losses would be 9 ... not 15.

The problem comes in when the market is "out of sync" with your system and you hit 9 losses in a row, then one winner, one break even, and then another 9 losses....then another winner and then 8 losses. At that point, the market "falls back in sync" with your system, but you've taken a beating. Yes...your account has taken a beating, but you psyche has taken an even greater one. If you're used to winning 70% of the time and you pass through such a time of trial you begin wondering if you're not executing your system right, if the market has fundamentally changed so that your system doesn't work, if your broker is screwing you somehow....all kinds of negative stuff. Might make it difficult to pull the trigger at that point.
  • #15
  • Edited 5:32pm Oct 7, 2012 5:22pm | Edited 5:32pm
Quoting FXAssassin
Actually, the statistical probability says that if you have a 70% win ratio system, then the max number of sequential losses would be 9 ... not 15.

The problem comes in when the market is "out of sync" with your system and you hit 9 losses in a row, then one winner, one break even, and then another 9 losses....then another winner and then 8 losses. At that point, the market "falls back in sync" with your system, but you've taken a beating. Yes...your account has taken a beating, but you psyche has taken an even greater one. If you're used...
Pretty smart. Excellent conclusion.

Side note: High leverage can be beneficial if you know why, how, where and when or when not to use it.
Fuck Forex Factory.Wake up people.
  • #16
  • Edited 3:31am Oct 9, 2012 3:20am | Edited 3:31am
Leverage seems to be miss-understood by many that start in forex.
And most of the time mixed with risk calculation... the 2 things are independent from each other.

The leverage a Broker grants .. say 1:100, 1:200 etc., it is the MAx credit granted to you.

If they grant 1:100, it means that per each $ 1 deposited you can buy $100 in credit

Say you were given a Max of 1:100 from your Broker...and your your deposit is $1000.

Anytime you purchase the amount of your deposit.. that would be 1 leverage, regardless of the Max the Brokers granted you. If you buy 2000 units.. that would be 2 leverage. ... if you have trade open for 2000 units... are you you could still buy another $98 000 worth of currencies.

Now, the risk you want to take is a different calculation... that would involve your SL.


Point is... why anybody would buy more then 2 or 3 times of units of your deposit. It is like if your Bank gives you a Credit card with a max of $25 000
and you year salary is $50 000 .. why would you max the card up and get in debt 50% of your year salary?

Using more then 5 leverage, (5 times the amount of your deposit) combined in a few trades is already a bit crazy.



J.
  • #17
  • Oct 9, 2012 7:40am Oct 9, 2012 7:40am
I disagree with you primarily because of broker risk. Why would I deposit 100% of my trading capital with a broker. If he goes bankrupt then I may lose everything I have on deposit with him.

If, on the other hand, I only deposit 20% of my trading capital with him and then use broker leverage I can still trade as if I deposited 100% but I have safety of funds guaranteed as my funds are back with my own bank.

Does it happen..it did to me and even with the CFTC getting some funds back for me I only ended up losing about 5% of my total trading capital.
  • #18
  • Oct 9, 2012 9:04am Oct 9, 2012 9:04am
Quoting jeuro
Point is... why anybody would buy more then 2 or 3 times of units of your deposit. It is like if your Bank gives you a Credit card with a max of $25 000
and you year salary is $50 000 .. why would you max the card up and get in debt 50% of your year salary?

Using more then 5 leverage, (5 times the amount of your deposit) combined in a few trades is already a bit crazy.
Give deeper thought to what you're saying here. You've compared using as corollary to a more traditional business taking on a line of credit. Then you indicate that someone who takes on that line of credit should actually use all of it. I don't know how much of the available credit limit one "should" use in order to not be considered "a bit crazy" but let's just say that it's somehow agreeded in general circles that it's 50%.

How does that make sense. If a business needs $50,000 of capital for whatever expansion it's going to pursue, then by this 50% figure, they would need to apply for a $100,000 line of credit. Why would they need to do that though if they only needed $50,000?

Once could use the same type of logic with trading. If you needed to use 500:1 leverage for a particular strategy but they didn't want to use more than 1/2 of their available balance, they could just go to one of those brokers who offer 1000:1 leverage....then they'd not be using up all the credit balance.

I think it becomes clear that this doesn't really make sense. One should build a strategy and then fit the leverage to to the strategy...not the other way around.

Also, remember that if you have to start cutting positions sizes down from where your system says they should be simply because you "can't" find a broker to give you the leverage needed to run the system properly, the performance dampening effect on a positive expectancy system is MUCH greater than the degree of the cut.

Example: if you have a positive expectancy system that calls for the use of 200:1 leverage and you can only get a broker that has 100:1...then if you cut the positions sizing down by 1/2 the system will still make money...but it won't take just a 50% hit....it will take a much LARGER hit than 50% because of the compounding effect (assuming you increase position size as the account balance grows). It gets a lot worse if the system calls for a 200:1 leverage and you can only get 50:1. A LOT worse.

Again...fear of leverage is irrational. As long as your system is profitable you should use whatever leverage the system calls for.
  • #19
  • Oct 9, 2012 11:11am Oct 9, 2012 11:11am
Quoting flyer415
I disagree with you primarily because of broker risk. Why would I deposit 100% of my trading capital with a broker. If he goes bankrupt then I may lose everything I have on deposit with him.

If, on the other hand, I only deposit 20% of my trading capital with him and then use broker leverage I can still trade as if I deposited 100% but I have safety of funds guaranteed as my funds are back with my own bank.

Does it happen..it did to me and even with the CFTC getting some funds back for me I only ended up losing about 5% of my total trading capital....

Well..Sure...this is a different approach. If you deposit only 20% of your working capital with deposit safety in mind. That is fine. But then, whatever amount you operations are, they will be according to your total working capital...the one inside the broker and the other at your Bank... right?

Your accounts in the Brokers may seems over-leveraged... but in reality is not according to your overall working capital.

Regarding brokers going BK... thats why is good to trade withe Brokers In Switzerland, UK or some EU countries. They have Compensation Funds to investors, similar to the FDIC in USA ... but in the countries I mentioned, the compensation extend to Clients of forex Brokers... in US I believe does not.

J.
  • #20
  • Oct 9, 2012 11:25am Oct 9, 2012 11:25am
Quoting jeuro
Well..Sure...this is a different approach. If you deposit only 20% of your working capital with deposit safety in mind. That is fine. But then, whatever amount you operations are, they will be according to your total working capital...the one inside the broker and the other at your Bank... right? That is correct.

Your accounts in the Brokers may seems over-leveraged... but in reality is not according to your overall working capital. That is correct.

Regarding brokers going BK... thats...

I just believe that safety of deposit is paramount.
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