Leverage in Forex

parthaab · #1 16th December 2006, 12:31 AM

I am fairly new to the forex trade and would like some seniors to share their experience with leverage in forex which ranges from 1:50 to 1:400.

More specifically, does nt the leverage allow the capital to be wiped out fairly quickly in the trade? Hence, is nt going for a lower leverage a better strategy?

dilsefx · #2 17th December 2006, 01:57 PM

Leaverage indeed is a double edge sword.
For better understanding of the toopic let us take some example of actual trades with dif leaverages. i shall take in consideration five diff leaverage for a single trade .
Say i am going long on a pair for example cable(GBP/USD) at a rate say 1.8500 for a std lot size of 100000 $.
Now
if i take a leaverage of 1:1 broker will ask me to pay 100000 $ as margin.
if i take a leaverage of 1:10 broker will ask me to pay 10000 $ as margin
if i take a leaverage of 1:100 broker will ask me to pay 1000 $ as margin
if i take a leaverage of 1:200broker will ask me to pay 500 $ as margin
if i take a leaverage of 1:400 broker will ask me to pay 250 $ as margin

This is very well known to all .
Now what happens when i get say 5 pips as peofit in my trade.
Ler us see what happens to my a/c.

My profit will be 50 $ regardless of the leaverage i have used .
So now it is for you to decide how to make the best use of the leaverage.

parthaab · #3 17th December 2006, 09:12 PM

Thanks dilsefx

What would be an 'ideal' size to trade then?

bhatiaashish007 · #4 22nd December 2006, 05:56 PM

i feel leverage is not that bad as is assumed to be.My personal policy is if you are new to forex and is not able to trade volatility during active trading hours you should use minimum leverage while during consolidating market hours you should use maximum leverage and scalp the market so that you could have maximum benefits from the forex market.

madhu · #5 7th January 2007, 03:22 PM

Quote:

Originally Posted by dilsefx

Leaverage indeed is a double edge sword.
For better understanding of the toopic let us take some example of actual trades with dif leaverages. i shall take in consideration five diff leaverage for a single trade .
Say i am going long on a pair for example cable(GBP/USD) at a rate say 1.8500 for a std lot size of 100000 $.
Now
if i take a leaverage of 1:1 broker will ask me to pay 100000 $ as margin.
if i take a leaverage of 1:10 broker will ask me to pay 10000 $ as margin
if i take a leaverage of 1:100 broker will ask me to pay 1000 $ as margin
if i take a leaverage of 1:200broker will ask me to pay 500 $ as margin
if i take a leaverage of 1:400 broker will ask me to pay 250 $ as margin

This is very well known to all .
Now what happens when i get say 5 pips as peofit in my trade.
Ler us see what happens to my a/c.

My profit will be 50 $ regardless of the leaverage i have used .
So now it is for you to decide how to make the best use of the leaverage.

Excellent point. It is always better to use less money to make more and therefore using the highest leverage available is best in my opinion and the opinion of my calculator. The cautions about high leverage are always based on the expectation of consistently losing in which case you should not be trading with real money. Demo accounts are good for learning to trade. When you learn to trade you will make more money with high leverage. This is expressed in the video course at www.tradingmastermind.com

parthaab · #6 22nd June 2007, 10:56 AM

Despite many advices some from people more senior than me, I suggest that having a leverage of 1:100 or above is a bad idea.

This is because you need a stop loss that factors in volatility, which in most cases, is above 1%. For eg., when you have a leverage of say 1:100, and you buy say Eur/usd at 1.28, with a stop-loss of 1.26, then even if it goes against you by .012, to 1.268, you have lost all your investment strightaway! Long before it reached the stop loss!

And if it is 1:400, you lose out even before - even if it goes against you by just 0.004! That is 1.2800 to 1.276! Or 0.25%!

Thus, increasing leverage is a means to ensure that you lose money in forex, since in most cases, the volatility will wipe you out with even minor fluctuations.

This should be pondered upon by all beginners before venturing out into forex.

I dont know any brokerage that offers leverage of 5 or 10%.

madhu · #7 22nd June 2007, 11:24 AM

This formula is based on the idea of opening an account and placing your entire account into one trade which would certainly cause the loss of your entire account. The way that traders actually manage their accounts is to only risk a certain percentage in a trade. 2% is considered a good maximum by some professionals and fund managers. However that figure is based on having a poor win to loss ratio. If you have a trading method that actually works, the amount that you risk can be slightly higher.

The amount of your risk is determined by the number of PIPS in your stop loss times the value of a PIP in your account. (times the number of lots traded). So whether you use 100:1 or 50:1 leverage your risk will be exactly the same. But with a higher leverage the amount of your deposit will be less and therefore you will have more margin available and therefore it is less risky to use higher leverage. Lower leverage simply means that you choose to risk more of your own money as a deposit in the trade but the actual risk remains the same.

Forex Trading Video Course

chof · #8 24th August 2007, 07:51 AM

i agree with some of the other posters. if you are new to forex you do not need (or want) to use much leverage. If you were conservative you would probably only risk 2% of your trade on any one position and would leverage yourself around 3:1. Your best bet may be using oanda that way you can trade any lot size; othewise get a micro account.

3:1 is your position (technical) leverage. Your broker leverage (50:1 - 400:1) is what determines your used margin. Which equals the position size / leverage.

jjshah · #9 26th August 2007, 06:34 PM

Quote:

Originally Posted by chof

i agree with some of the other posters. if you are new to forex you do not need (or want) to use much leverage. If you were conservative you would probably only risk 2% of your trade on any one position and would leverage yourself around 3:1. Your best bet may be using oanda that way you can trade any lot size; othewise get a micro account.

3:1 is your position (technical) leverage. Your broker leverage (50:1 - 400:1) is what determines your used margin. Which equals the position size / leverage.

That's true. Your true leverage is not same as your broker leverage your true leverage is your position size/account size and for beginner better to use less than 5:1 true leverage and never use high true leverage if you want to stay in the business for long.

JungleLion · #10 27th August 2007, 08:20 PM

I prefer a max of 1:100 leverage it is the safest.

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