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High leverage vs Low leverage

  • #1
  • First Post: Edited 1:14pm Feb 24, 2015 6:52am | Edited 1:14pm
Hello,
Which is better for a beginner : Having a high leverage with small position size or having low leverage with small position size ? I have 2 demo accounts both are loaded with $700
When I opened a position on my 1:500 leverage account (0.5 lot) the used margin was ~$100 so I had $600 free margin (Trade volume 50K)
When I opened a position on my 1:100 leverage account (0.5 lot) the used margin was ~500 so I had $200 free margin (Trade volume 50K)

Having a less free margin means less ability to handle floating loss and as you know the prices keeps getting up and down and therefore this low free margin may damage my ability to be flexible with the market (handling floating loss) until It reaches my T/P .Let's say I have long position and the price decreased by 40 pips ($200 because I have 0.5 lot size) and then increased by 60 pips . In the first account I can handle the 40 pips floating loss but in my second account I'll get margin call and they'll close the position . Am I understanding it wrong ? As I see having more free margin is in my favor , isn't it ?

**Note : I'm not having more than one position active in the same time
  • #2
  • Feb 24, 2015 12:35pm Feb 24, 2015 12:35pm
(1). 1:500 account, -40 pips move, what is loss in $?
(2). 1:100 account, -40 pips move, what is loss in $?
  • #3
  • Feb 24, 2015 12:37pm Feb 24, 2015 12:37pm
Absolutely, high leverage is better. Your point is dead on, you would be margin called in one account and not the other. You still need to control the % you risk per trade of course. Basically, what high leverage does is allows you to make smaller deposits with the broker as opposed to needing to put your entire forex roll with them just to cover margin.
  • #4
  • Feb 24, 2015 12:38pm Feb 24, 2015 12:38pm
Quoting Jack168
(1). 1:500 account, -40 pips move, what is loss in $? (2). 1:100 account, -40 pips move, what is loss in $?
He's trading same position size in both
  • #5
  • Feb 24, 2015 1:09pm Feb 24, 2015 1:09pm
Quoting Jack168
(1). 1:500 account, -40 pips move, what is loss in $? (2). 1:100 account, -40 pips move, what is loss in $?
loss on both accounts is $200 . Since I'm trading with the same position size (0.5) &only one opened position at once
  • #6
  • Feb 24, 2015 1:11pm Feb 24, 2015 1:11pm
Quoting Profit Daily
Absolutely, high leverage is better. Your point is dead on, you would be margin called in one account and not the other. You still need to control the % you risk per trade of course. Basically, what high leverage does is allows you to make smaller deposits with the broker as opposed to needing to put your entire forex roll with them just to cover margin.
Good to hear that . I thought I was misunderstanding it or something lol since I was told that high leverage is very risky even by the customer support of FxPro , but when comparing the 2 cases I find it more safe to have higher leverage because I'll be more flexible with floating loss . I also put S/L always upon opening the trade .
  • #7
  • Feb 24, 2015 1:28pm Feb 24, 2015 1:28pm
Quoting hals12
{quote} Good to hear that . I thought I was misunderstanding it or something lol since I was told that high leverage is very risky even by the customer support of FxPro , but when comparing the 2 cases I find it more safe to have higher leverage because I'll be more flexible with floating loss . I also put S/L always upon opening the trade .
Since you're a new member here, I am not sure how long you have been trading, so I want there to be no misunderstanding of what I am trying to explain. You need to determine your forex roll prior to opening any account. You should never risk more than 2-3% of that amount on any trade. Let's just say that amount is $10,000. You shouldn't risk more than 200-300 per trade. The ONLY benefit to a high leverage broker is the amount you need to provide them is much lower to execute the same trade. So with a 10K roll, let's say you want to risk $200 on AUDUSD, let's say .5 lots with 40 pip s/l = $200. With a 500:1 broker you only need $100 in margin for that trade so you can send them the $200 you're risking, with a 100:1 broker you'll need to send $500 just for margin, and if you're in the US, you'll need to provide $1,515 just for margin. Pretty ridiculous, you need to put up $1,515 to risk $200. This is why as a US resident, I only use offshore brokers.
  • #8
  • Feb 24, 2015 1:53pm Feb 24, 2015 1:53pm
Quoting Profit Daily
{quote} Since you're a new member here, I am not sure how long you have been trading, so I want there to be no misunderstanding of what I am trying to explain. You need to determine your forex roll prior to opening any account. You should never risk more than 2-3% of that amount on any trade. Let's just say that amount is $10,000. You shouldn't risk more than 200-300 per trade. The ONLY benefit to a high leverage broker is the amount you need to provide them is much lower to execute the same trade. So with a 10K roll, let's say you want to risk...
I'm still new to the world of forex . My capital is about $700 so %3 of my capital is 21 (4 pips when trading 0.5 lot) . I've been on demo account for about a month and in best cases I had a floating loss of 5-10 pips before the market went into my favor . So If I put my S/L at 4 pips then I'll lose my capital with no single win . What I don't understand till now is why people saying high leverage is harmful for beginners ?? it has no effect rather than increasing my free margin .
  • #9
  • Feb 24, 2015 2:00pm Feb 24, 2015 2:00pm
Quoting hals12
{quote} I'm still new to the world of forex . My capital is about $700 so %3 of my capital is 21 (4 pips when trading 0.5 lot) . I've been on demo account for about a month and in best cases I had a floating loss of 5-10 pips before the market went into my favor . So If I put my S/L at 4 pips then I'll lose my capital with no single win . What I don't understand till now is why people saying high leverage is harmful for beginners ?? it has no effect rather than increasing my free margin .
It's very harmful if trading your entire roll at high leverage. If a 4 pip s/l is 3%, your position size is way too big. You should be trading half a mini lot with that balance, in other words 1/10th of your current size, this will allow a 40 pip s/l, but that changes on each trade. You may have trades that require a 100 pip s/l and trades which require a 10 pip s/l, adjust your position size accordingly. The other benefit to high leverage is when trade moves in your favor, you can add to it with the extra free margin, just average your cost and keep stops at break even, now you have the ability to compound at a much quicker pace risk free
  • #10
  • Feb 24, 2015 2:06pm Feb 24, 2015 2:06pm
Quoting hals12
Hello, Which is better for a beginner : Having a high leverage with small position size or having low leverage with small position size ? I have 2 demo accounts both are loaded with $700 When I opened a position on my 1:500 leverage account (0.5 lot) the used margin was ~$100 so I had $600 free margin (Trade volume 50K) When I opened a position on my 1:100 leverage account (0.5 lot) the used margin was ~500 so I had $200 free margin (Trade volume 50K) Having a less free margin means less ability to handle floating loss and as you know the prices...
It depends if you decide to take a winning or a losing trade.
Lower leverage if you opt to go for a winning trade. You can use high leverage if your aim is to lose some money on a trade.

I think 99.99% of the people trade to make a gain. This is why they lose in forex.

Look at my explorer. You will never find a winning trade. This is the secret.
The Thief of Wall Street
  • #11
  • Feb 24, 2015 3:15pm Feb 24, 2015 3:15pm
Quoting hals12
Let's say I have long position and the price decreased by 40 pips ($200 because I have 0.5 lot size) and then increased by 60 pips . In the first account I can handle the 40 pips floating loss but in my second account I'll get margin call and they'll close the position . Am I understanding it wrong ? As I see having more free margin is in my favor , isn't it ? **Note : I'm not having more than one position active in the same time
You never need more than 5x leverage. The reason why is because theoretical ROI goes down way too much to justify more leverage. If there is a 100 pip move, your 1:500 is left with $200 while your first account will still have $500 left. You might be saying that it's probably not going to happen, but that's not true. If there is a 40 pip move down, you're obviously not going to get out since you don't want a margin call forcing you to get out at that level. So you'd likely stay in and if you lost more more it would be even more tempting to stay in. To turn $200 to $500 requires a 250% gain. An impossible short-term task unless you gambled again.
  • #12
  • Feb 24, 2015 3:33pm Feb 24, 2015 3:33pm
Quoting replaced
{quote} You never need more than 5x leverage. The reason why is because theoretical ROI goes down way too much to justify more leverage. If there is a 100 pip move, your 1:500 is left with $200 while your first account will still have $500 left. You might be saying that it's probably not going to happen, but that's not true. If there is a 40 pip move down, you're obviously not going to get out since you don't want a margin call forcing you to get out at that level. So you'd likely stay in and if you lost more more it would be even more tempting...
Leverage is relative to your stop loss, if I am precise enough to use a 10 pip s/l and I feel it's a grade "A" setup, I may want to risk 5 %. In this scenario, I can use 50:1, therefore if I get a 100 pip move, I've made 50%. This is exactly why I cannot use a USA broker, as in above example, I'm only risking 5%, but wouldn't have the required margin to even execute the trade.
  • #13
  • Feb 24, 2015 3:43pm Feb 24, 2015 3:43pm
Quoting replaced
{quote} You never need more than 5x leverage. The reason why is because theoretical ROI goes down way too much to justify more leverage. If there is a 100 pip move, your 1:500 is left with $200 while your first account will still have $500 left. You might be saying that it's probably not going to happen, but that's not true. If there is a 40 pip move down, you're obviously not going to get out since you don't want a margin call forcing you to get out at that level. So you'd likely stay in and if you lost more more it would be even more tempting...
He loses on both accounts the same amount of money with a 100 pip move against him, since he uses the same position size. No matter what the leverage for the account is.
  • #14
  • Feb 24, 2015 3:44pm Feb 24, 2015 3:44pm
If we are strictly talking about the position size being the same no matter the leverage...higher leverage benefit you...but the problem with beginner traders is emotional responsibility.
  • #15
  • Feb 24, 2015 4:32pm Feb 24, 2015 4:32pm
Quoting Profit Daily
{quote} Leverage is relative to your stop loss, if I am precise enough to use a 10 pip s/l and I feel it's a grade "A" setup, I may want to risk 5 %. In this scenario, I can use 50:1, therefore if I get a 100 pip move, I've made 50%. This is exactly why I cannot use a USA broker, as in above example, I'm only risking 5%, but wouldn't have the required margin to even execute the trade.
10 pip s/l?? Of course you're going to lose your entire account with a 10 pip S/L. All of your money is going to be lost on trading costs and leverage. A 10 pip s/l will trigger 9 times for every 100 pip move gained. What is the ROI needed just to pay off commissions and spread? You should know all of this before thinking about placing a trade.


Quoting GU-Night
{quote} He loses on both accounts the same amount of money with a 100 pip move against him, since he uses the same position size. No matter what the leverage for the account is.
No he does not. Once he has $500 left, he no longer has the margin to support a $5000+ position. So that means margin call at 40 pips. Which means that one account loses 40 pips while the other ends up losing 100 pips.
  • #16
  • Feb 24, 2015 4:53pm Feb 24, 2015 4:53pm
Quoting replaced
{quote} 10 pip s/l?? Of course you're going to lose your entire account with a 10 pip S/L. All of your money is going to be lost on trading costs and leverage. A 10 pip s/l will trigger 9 times for every 100 pip move gained. What is the ROI needed just to pay off commissions and spread? You should know all of this before thinking about placing a trade. {quote} No he does not. Once he has $500 left, he no longer has the margin to support a $5000+ position. So that means margin call at 40 pips. Which means that one account loses 40 pips while the...
What are you talking about? You're assuming a 10% win rate. I'm not stating every trade should have a 10 pip s/l, what I'm saying is your position size is relative to your stop loss. What do you mean by all your money will be lost to leverage? I pay .6 pip in commission, so I'll make my stop 9.4. It's all relative. 5% risk is 5% risk, 10% risk is 10% risk, etc.
  • #17
  • Feb 24, 2015 4:57pm Feb 24, 2015 4:57pm
Quoting replaced
{quote} 10 pip s/l?? Of course you're going to lose your entire account with a 10 pip S/L. All of your money is going to be lost on trading costs and leverage. A 10 pip s/l will trigger 9 times for every 100 pip move gained. What is the ROI needed just to pay off commissions and spread? You should know all of this before thinking about placing a trade. {quote} No he does not. Once he has $500 left, he no longer has the margin to support a $5000+ position. So that means margin call at 40 pips. Which means that one account loses 40 pips while the...
I've just read through the thread you started, and it is clear you do not understand how leverage works.
  • #18
  • Feb 24, 2015 5:02pm Feb 24, 2015 5:02pm
Quoting Profit Daily
{quote} What are you talking about? You're assuming a 10% win rate. I'm not stating every trade should have a 10 pip s/l, what I'm saying is your position size is relative to your stop loss. What do you mean by all your money will be lost to leverage? It's all relative. 5% risk is 5% risk, 10% risk is 10% risk, etc.
Leverage increases the randomness and volatility of a trade. Why would my 10% win rate not be accurate? What should it be at and how do you know?

A 5% loss requires either a 5.26% gain to break even or an increase in leverage of 5.26% to break even at 5%.

Quoting Profit Daily
{quote} I've just read through the thread you started, and it is clear you do not understand how leverage works.
How do I not understand? How could someone lose more than 100 pips if they get an MC at 40 pips?
  • #19
  • Feb 24, 2015 5:15pm Feb 24, 2015 5:15pm
I see leverage like "which is the limit before i can't open more orders". If you use SL i think leverage isn't a problem while you have enough equity. For me, most difficult thing is where you put a SL. Or if you don't put it, where you cut losses...
Try don't lose pants never...
  • #20
  • Feb 24, 2015 5:51pm Feb 24, 2015 5:51pm
Quoting replaced
{quote} Leverage increases the randomness and volatility of a trade. Why would my 10% win rate not be accurate? What should it be at and how do you know? A 5% loss requires either a 5.26% gain to break even or an increase in leverage of 5.26% to break even at 5%. {quote} How do I not understand? How could someone lose more than 100 pips if they get an MC at 40 pips?
Once again, you are assuming a 50% win rate. If I win 70% of my trades with an average risk;reward of 2 to1, the more leverage the better! I also scale into trades so I'll open a trade with 10:1 when it goes in my favor 100 pips, I'll add at 10:1 and move stops to be. I have experienced times where I am at 200:1 with stops at break even, risk free.
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