Money management - page 7

New comment
 
William Roeder #:
Absolutely. Leverage just allows you to trade. It has nothing to do with your risk on the trade. If you open an order with a fixed lot and fixed SL. What changes if you change the account leverage?
Nothing
 
William Roeder #:
Absolutely. Leverage just allows you to trade. It has nothing to do with your risk on the trade. If you open an order with a fixed lot and fixed SL. What changes if you change the account leverage?

Leverage allows investors to increase their exposure to a market, whether real estate, stocks, or commodities. If managed well, leverage can work in an investor’s favor. But some investors take on too much leverage. When the market goes against them, it amplifies the negative impact. In some extreme cases, an investor can be wiped out just from using too much leverage


Leverage is (borrowed money, will you gain wih some other person's money a margin to repay your debt and stay in positive?)  the use of debt or credit to acquire an asset without paying the full price. Some definitions define leverage as the use of debt to purchase more than you can afford. That isn’t always true. An investor may have enough cash to purchase an asset but chooses to supplement the purchase with debt rather than reduce/drain their cash reserves.


some random example form google search

For example, an investor wants to buy 100 shares of a $100 stock. That’s a total value of $10,000. The stock’s margin requirement is 30%. This means the investor’s equity in the position must not fall below 30% or $3,000 in this case. 

The investor puts in $5,000, and the remaining $5,000 becomes available as a margin loan. These loans do incur interest just like any other interest-bearing loan.

An investor with a $5,000 account can basically double their buying power and holdings by using leverage. However, This is an extremely risky situation.

Why Is Leverage Risky?

Leverage extends an investor’s exposure to a market and can also put them into a risky situation. This is particularly true for an investor who is purchasing more than they can afford. 

Going back to our $5,000 account that has $10,000 in buying power, what happens if the investor purchases $10,000 in stock and the value of their holdings move against them by 15%? That’s equal to an unrealized loss of $1,500, putting the total value of the position at $8,500. 

The $5,000 margin loan remains, leaving $3,500 (of the original $5,000) as investor equity. At this point, the investor has lost 30% of their equity in this position. Suppose the position drops by another $500, investor equity will hit $3,000 or 30%, the margin requirement. The investor will receive a margin call. They’ll have to sell some of the position to increase equity or deposit cash into their account


Does leverage reduce risk?
The other forms of leverage, the other five forms of leverage, you can reduce risk while increasing returns. But with financial leverage, it's consistent. It increases risk and increases return if you get it right.


I can come with precise calculations but I don't think it's the case when talking to a guru fo mql5 community

Second, while risk varies positively with leverage, risk-taking can increase without increasing leverage, so we need to think about all major forms of risk-taking that can threaten financial stability

 
Marian Nelu Iopsu #: OMG, are you real? wiliam roeder which comment i have been reading from years, would never state a sentence like that. the main risk of an retailer account is leverage. i would need to go back to basics to ilustrate an example here, but do I need to? wrong leverage is the first thing that will burn an unexperienced trader account. common, do I need to explain this simple fact?

William is correct! Leverage does not affect the risk exposure.

Margin is like a security deposit you would pay when you rent out a car. The security deposit is then refunded when you return the car.

Margin (Leverage) is the same. You pay a certain amount when you place a trade and get it back when you close the trade.

That is why there is a difference between the Balance and the Free Margin which represents the true floating equity/capital that is available to you to risk, as the Margin "security deposit", has been deducted, which you will get back when the trade closes.

EDIT: I would suggest that traders always base their fractional risk calculations based on (Balance - Used Margin), or the minimum of the Balance and Free Margin.

 
Marian Nelu Iopsu #: Why Is Leverage Risky?
It is risky because traders don't calculate the risk exposure properly (based on stops size). and just use a fixed position size (lots) irrespective of their account balance and leverage settings, or they base their risk based on the margin requirements only.
 
Fernando Carreiro #:

William is correct! Leverage does not affect the risk exposure.


I can't believe you guys know nothing about trading live. 

Is higher or lower leverage better?
The lower your leverage ratio is, the easier it will be for you to secure a loan. The higher your ratio, the higher financial risk and you are less likely to receive favorable terms or be overall denied from loans.

In trading the higher the leverage the higher the exposure of your account to risk. This is the ABC of a trader, how much you risked, how much you've lost how much you've won in trading? this is unbelievable

 
Marian Nelu Iopsu #:

I can't believe you guys know nothing about trading live. 

Is higher or lower leverage better?

In trading the higher the leverage the higher the exposure of your account to risk.

  1. It is you that doesn't understand that risk and leverage are separate things.

  2. Neither is better nor worse. As long as you have enough to open the trade, it makes no difference.

  3. Higher leverage allows high risk; it does not create any risk.

 
Marian Nelu Iopsu #: I can't believe you guys know nothing about trading live. Is higher or lower leverage better? The lower your leverage ratio is, the easier it will be for you to secure a loan. The higher your ratio, the higher financial risk and you are less likely to receive favorable terms or be overall denied from loans. In trading the higher the leverage the higher the exposure of your account to risk. This is the ABC of a trader, how much you risked, how much you've lost how much you've won in trading? this is unbelievable

It seems it is you that does not understand your ABC of trading!

Leverage is like a bank loan. Having a loan does not make it more or less risky. It is what you do with that loan that can make it more or less risky.

If you decide to use a large amount of that loan, then obviously it is a high risk. If you decide only to use a small amount then it is less risky. It all depends on how you calculate your risk and how you wish to apply that loan.

In the end, you have to pay the loan back, so it is important that you know how to properly use that loan and don't blow it all on not knowing how to calculate your risk exposure properly.

EDIT:

Leverage is "like" a loan, but not the same.

Margin is "like" a security deposit, but not the same.

 

Here is an example. Say you are trading 1 Lot of EURUSD with a stop loss of 10 pips (100 points) with a USD account currency.

When the position hits the stop-loss, your loss is 10 pips x $10 = $100. That was your risk, your stop-Loss, $100 USD.

Now tell me, what does that have to do to with the leverage?

It could have been an account with 1:1 or 1:100 or 1:1000. It did not matter at all. It was still a 1 Lot trade with a 10 pip S/L risk exposure.

So tell me, where did leverage come into that risk calculation?

EDIT: You did have to put down a "security deposit" (margin based on the leverage) when you placed the trade, but you got that back as soon as the trade closed.

EDIT2: Obviously your original balance has to have enough capital be able to handle both the risk loss as well as the margin ("security deposit"). If your balance is not large enough to be able to handle that then obviously you can't place the trade. That is where leverage and margin comes in, but that is all.

 
Fernando Carreiro #:

Here is an example. Say you are trading 1 Lot of EURUSD with a stop loss of 10 pips (100 points) with a USD account currency.

When the position hits the stop-loss, your loss is 10 pips x $10 = $100. That was your risk, your stop-Loss, $100 USD.

Now tell me, what does that have to do to with the leverage?


Thank you for your example, it is correct

1:1 leverage

margin used 100.000

10 pips loss is 100 

return is negative 0.1%


1:100 leverage

margin used 1.000

10 pips loss is 100

return is negative 10%


leverage has to do with money used in your position of 1 lot, while loss is in both cases 100, the return on used money is diffrent based on leverage

 
Marian Nelu Iopsu #: Thank you for your example, it is correct ... leverage has to do with money used in your position of 1 lot, while loss is in both cases 100, the return on used money is different based on leverage

Please note that the Return on Investment does not have to do with the Risk calculations. ROI is one thing, while Risk (be it absolute value or percentage) is another. Please don't mix those up.

And also please don't go about saying that we don't know anything about trading! None of us are born knowing things and we all make mistakes, but it is how we go about learning and correcting our mistakes that makes us grow better and wiser with time.

12345678
New comment
Reason: