Question About Leverage

I want to ask a question about leverage in general terms - not about a specific broker. Is this a good section to ask?

I am assuming that a currency pair will not lose more than 10% after my initial price. And I want to use 1:10 leverage. If things go as I expected, there will be no margin call, is that correct? How much % should it drop from the initial price, so that there will be a margin call?

Your thought is mainly correct if YOU use a 1:10 leverage, not if a BROKER allows you a 1:10 leverage. It would be like you are stating if you didn't have any margin requirement and the broker was closing your position(s) when your account reach 0, but as you probably guessed right now, it is NOT working this way.

First of all, what is commonly referred as a "margin call" is not a margin call, but a stop out. A margin call is what it says it is: When your broker tells you to deposit additional money, transfer from another account, close some positions or whatever because your are running out of margin. It is only a warning and has no consequence in itself. It may be a message, your account balance turning pink in MT4 or the moment you are going to hear from your account manager if you have a big account. On small accounts, things go usually very quick (in almost all case, too quick to deposit additionnal money) until the stop out, which is when your broker closes your position(s) according to their rules (usually one by one, the most loosing one first). What is important to know, which is not very often discussed or even advertised by brokers is their stop out level.

The stop out level, is the percentage of margin that triggers the stop out when reached. It is usually 30 or 50% but can go up too 100% (at 100% there is no "margin call", you have directly a stop out)

The margin call and stop out levels are relative to required margin. But what is important to understand is that only a portion of the required margin can be used to cover your position(s) loss (the percentage until the stop out level). So in your example, at 1:10, you need to have at least 10% of your trade amount to open the position, and then if we take a 30% stop out level, you can loose up to 70% of this amount (+money you had in excess of the 10% required margin of course)

To open a position (or an additionnal one) you always need 100% of the required margin (sometimes referred to "initial margin"), and after the position is opened you can eventually go down until the stop out level (in some cases referred as "maintenance margin"). This margin is more here to protect the broker than the trader (unless you think he is stupid and he must be stopped from opening a too big position compared to his account size. This is what the NFA will argue, it's up to you to trust them if it's true), it is the time the broker has to close the positions in a very sharp market move before the account reach 0, or especially on the week end, because of the gap until the next week opening (reason why some brokers lower their leverage on friday afternoon until next week)

What all this means, is that the HIGHER leverage a broker is proposing you, the LESS likely you are to have a stop out (with the same positions size and account size, and of course if your positions turn out at some point). Your interest as a trader is ALWAYS to take the HIGHEST leverage possible if you know what you are doing and don't consider you need your broker to forbid you to take additionnal positions. With the same positions, higher leverage is not riskier, but LESS risky if you want to avoid a stop out.

The best example why higher leverage is better: If you have, let's say 15% of trade size, you open a trade which becomes a 3% winner, put a stop loss on your existing winning trade so that it can NOT make you loose any money, at 1:10, you wouldn't have enough margin to open a second trade...

The leverage is the ability of one become 1 thousand..u borrow from broker and u invest to market

There are some disadvantage of leverage

1) u cannot control on risk
2) u will face to margin call when the leverage reduce over time
3) it is agreement between broker and trader

so,dont think to much about leverage

go to bank system and ask them to borrow some money by using 1:1 system

u cann do it bro..believe on passion and ability to push the limit of our brain

Mevo, Thank you so much for the very detailed reply. Now after reading your post everything is clear for me. All the best from here!....

ps. thanks to the other poster too.

Well explained Mevo! The points and definitions couldn't be more clearer, am quite sure he got the point!

Gorinw and Come alive, thank you very much for your kind messages !