The recurrent question
Most of my follower (https://www.mql5.com/en/signals/129429) read the description of my trading system where I declare to work with no leverage and when they see my Broker leverage is 1:500 they ask me:
Why you declare to work with no leverage if i read 1:500?
The difference..
Let's start from the Broker leverage.
This is a moltiplicator that multiplied with the part of your capital used to open a position (margin) give the entry size.
EXAMPLE: let's suppose you want to enter at market with 1 lot (100.000 €). Not many people physically have 100.000 € to enter at market (lucky who have! :) ). Brokers give us an instrument to help also less wealthy traders to trade 1 lot without have it physically on his account and this is the leverage. In my case, with a leverage 1:500, to enter at market with 1 lot I need only 200€ of margin, infact 200 € x 500 = 100.000 €. Broker who offer a leverage 1:200 will take you 500 € of your margin, that is because 500 € x 200 = 100.000 €.... and so on! Finally Broker who offer leverage 1:100 will take from you account 1000 € of margin (1000 € x 100 = 100.000 €).
What it mean? It mean that higher is the Broker leverage, lower is the margin that broker retain you to enter at market. This is a double edged weapon because from a side it leads many traders to enter at market with a size that is beyond their capabilities: remember that is true that gains will be high if market goes in your favor but also loss will be very high! On the other side you can use a moderate entry size using a little part of your account having more free margin for ongoing operations.
Operative leverage:
Is the ratio of the capital with which to enter the market and the capital of your account. Working with NO LEVERAGE mean to enter at market with the exact equivalent money of your trading account.
EXAMPLE: let's suppose I have 1000 € on my trading account. If I enter the market with 0,01 lots (1000 €) it mean I work with leverage 1 (no leverage, infact 1000/1000= 1). If I enter the market with 0,1 lots ( 10.000 €) it mean that I work with leverage 10 (Infact 10.000 / 1000 = 10).... and if I enter with 1 lot (100.000 €) it mean that I work with leverage 100 (100.000/1000 = 100), and so on!
There is also a leverage < 1. For example if I have 10.000 € on my trading account and I decide to work with 0,01 lots it mean that I work with leverage 1/10 = 0,1 that is the saviest way a trader can work! This is the secret for have low drawdown.
I hope with this article to have clarified the difference and to you any meditation to find the right balance of the 2 different tipe of leverage.
Ciao!!
Nicola Gagliardi
