What leverage is??? How it works??

[nishant 10]

Hello Everyone!

 

I'm grossly confused on what leverage means. Please help me out.

 

I'm putting an example:- Say, i'm having an account balance of $1133 and trading 100000 units as 1 lot and have a leverage of 100:1. So margin shall be $1000. So what does it basically mean? Does it mean that i can bear a loss till $1000 on that particular position or is that i can face a loss till $133 as the cushion towards my prospective loss before i get a margin call? Say for instance if i go short in GBP @ 2.0300 with a limit of 2.0100. What kind of Stop loss will subject me to margin call? What if i set stop loss at 2.0450? At what rate will i receive margin call and will eventually make Stop loss automatically triggered?

 

Further what shall be my position if i'm taking leverage of 200:1 instead of 100:1 with the same scenario above? After how many pips going against me from the level of my entry viz 2.0300 will subject me to a margin call? (or at what rate?)

 

Please help as i'm totally confused with the subject. Else if someone can provide me article links which happens to be exhaustive and makes my query clear.

 

Regards

[walterw 10]

Hello Everyone!

 

I'm grossly confused on what leverage means. Please help me out.

 

I'm putting an example:- Say, i'm having an account balance of $1133 and trading 100000 units as 1 lot and have a leverage of 100:1. So margin shall be $1000. So what does it basically mean? Does it mean that i can bear a loss till $1000 on that particular position or is that i can face a loss till $133 as the cushion towards my prospective loss before i get a margin call? Say for instance if i go short in GBP @ 2.0300 with a limit of 2.0100. What kind of Stop loss will subject me to margin call? What if i set stop loss at 2.0450? At what rate will i receive margin call and will eventually make Stop loss automatically triggered?

 

Further what shall be my position if i'm taking leverage of 200:1 instead of 100:1 with the same scenario above? After how many pips going against me from the level of my entry viz 2.0300 will subject me to a margin call? (or at what rate?)

 

Please help as i'm totally confused with the subject. Else if someone can provide me article links which happens to be exhaustive and makes my query clear.

 

Regards

 

Hi Nishant... a 200:1 leverage its not serious on my opinion...

 

100:1 its ok... let me give you the EFX example as I consider them a nice broker as they have an ECN type platform...

 

1 contract moves 10.000 units of X currency on x pair... for the sake of simplicty lets say its a USD pair ej. USD/JPY... so in that case each contract will cost you $100 as your leverage is 100:1 wich is $100 x 100 leverage = 10.000 units...

 

In terms of margin calls it depends on the broker... some work with a 25% others if their is equity for you position... no problem...

 

should you have at least $200 on acct for each $100 you trade you should be ok... and manage yourself with technical stops... hope this makes some sense... cheers Walter.

[nishant 10]

thanks Walter!

[PYenner 10]

Hi Nishant

 

$1133 is too small to be trading a whole lot, even a half lot would be stressful.

Opening a 1 lot position would take out $1000, leaving $133, but your pip margin would normally take another $10 per pip, depends on the pair, but there is only 13 pips = $130 (typically) to cover pip margin plus drawdown before you get a margin call.

 

If you trade half lots, entry costs you $500 plus $5 typically per pip of pip margin, say $10 in EURUSD for example, you then have $490 or about 49 pips of drawdown before you get a margin call. But you may need to read your suppliers rules to find out what call limits they apply.

 

If your supplier uses a 25% margin limit that might be nearly $300 on a $1200 balance and you probably are "allowed" to spend only $900 when opening a trade. So a 1 lot trade might get "insufficient funds" but a 1/2 lot might work.

 

Any balance below $2500 makes for stressful trading even using just half lots for me. It has been said that nobody has been known to successfully trade a 200:1 account long term, but maybe that is just talk, I don't know. I believe it would be frustratingly slow to trade with and the temptation to overtrade would crash the account for most people. It is said that the average trade lasts 1 to 4 hours and to spend 2-8 hours working for like $20, maybe, is maddening.

 

Leverage is very much a two edged sword, you need some leverage yet it is also the thing that kills most peoples balances I suspect. I am uncomfortable trading 1 lot on a $5k balance, I have become aware that it is tighter to trade with than it seems. You don't have to get far below $5k before drawdown frightens you and then you start becoming too nervous to leave a trade running. Close out on $20 plus or minus and find the pip margin eats your equity away when you trade like that. Leverage can be a stress mine field.

[PYenner 10]

If you compare p/l per pip on trades in the same pair on different weeks, you will probably find it paid or cost different $/pip on different weeks. It is not a fixed $/pip, it varies constantly with exchange rates.

[Jene 10]

leverage can be lethal. When things go wrong, complete wipe outs are the typical results. And note that I am not saying "If things go wrong..." because at some point, they will!

[BlowFish 10]

You did realise this thread has been dormant for 2 years right?

[brownsfan019 17]

You did realise this thread has been dormant for 2 years right?

 

How do people even find threads 2 years old? Who has the time to do that? And the desire to do that....

 

[BlowFish 10]

All I can think is that in very quiet sections of the forum they might only be a couple of pages back. Of course once they have been bumped it's pretty much impossible to tell. I dunno it's a bit of a mystery to me. Actually sometimes when its an 'olden but golden' thread and the new input is substantive it can be welcome. More often than not that is not the case though.

[Obsidian 10]

How do people even find threads 2 years old? Who has the time to do that?...

bored forex traders?

 

anyway, since I am here, some info for beginners:

 

-How much in dollars is this movement worth, for example, per 100,000 Euros in EUR/USD?

 

(one pip, with proper decimal placement / currency exchange rate) x 100,000

 

(.0001/1.2550) x EUR100,000 = EUR 7.97

 

But we want the pip value in USD, so we then must multiply EUR 7.97 x (EUR/USD exchange rate): EUR 7.97 x 1.2550 = $10

[Jack Francisco 10]

Leverage is the ability to gear up your account- for low capital investors , a high leverage would be helpful as for example :

you want to open a 0.01 lot of EUR/USD , using a 1:1000 leverage you will need 0.16 margin , but with 1:500 u will need 0.31 Margin ( depends on quote at that time )

so the more your leverage gets lowered the more margin you will need to open a trade .

also keep in mind that high leverages are a potential risk for beginners so watch out of it

[Obsidian 10]

more than 1:100 is beyond bravery...

however 1:1000 sounds like a gamble of your lifetime..you can either become very rich or lose everything...%50 not that bad (good) :rofl: