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My understanding of leverage so far, please correct me if I am wrong !!

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mge0rge
60
mge0rge  

I am fairly new to this so please don't be annoyed if I sound silly . The subject is forex .

So I've done research over the internet and you hear leverage this and that, leverage is dangerous ,take care , but leverage if used properly can give you some amazing returns but you need to gain a lot of experience ,know what you are doing and so on.


But from what I understand so far from my own experience on the demo account is that we are already using leverage in order to make any money.So if 1 mini lot is 10 000 dollars worth of currency to enter a position with 1mini lot or 0.1 I would need 10 000 dollars (in broad terms). So at the moment i sold 0.3 on the euro/usd ,my margin is 360.31 , I am 11 pips in profit and I am making 33$ so far.

So basically I entered a position of 0.3 which would be 30k but I only paid 360 to the broker to be able to enter. So with no leverage if I wanted to enter a position of 0.3 I would need to have 30k in cash in my account .

Where am I so far ?

whroeder1
15902
whroeder1  
  1. You don't pay 360 to the broker, he impounds it and releases it when you close the trade.
  2. As you said, leverage can be dangerous. You shouldn't be even thinking about it. You should be thinking about your risk on a trade. The leverage just allows it. Never risk more than a small percentage of your balance on any single trade.
  3. In code: Risk depends on your initial stop loss, lot size, and the value of the pair.
    • You place the stop where it needs to be - where the reason for the trade is no longer valid. E.g. trading a support bounce the stop goes below the support.
    • Account Balance * percent/100 = RISK = OrderLots * (|OrderOpenPrice - OrderStopLoss| * DeltaPerLot + CommissionPerLot) (Note OOP-OSL includes the SPREAD, and DeltaPerLot is usually around $10/pip but it takes account of the exchange rates of the pair vs. your account currency.)
    • Do NOT use TickValue by itself - DeltaPerLot
    • You must normalize lots properly and check against min and max.
    • You must also check FreeMargin to avoid stop out
    Most pairs are worth about $10 per PIP. A $5 risk with a (very small) 5 PIP SL is $5/$10/5=0.1 Lots maximum. Use a EA GUI such as the one for MT4: Indicators: 'Money Manager Graphic Tool' indicator by 'takycard' Forum - Page 5
Angelito Cartagena
380
Angelito Cartagena  

In my own simple terms, leverage is the one determines how big or small the margin needed in a particular trade, the higher the leverage settings the smaller margin it requires in a particular trade, this is the dangerous part of using high leverage settings because traders will be tempted to trade using bigger lot sizes because their leverage settings allow it even if they only have a smaller capital, now there are two sides in it, either you win big of loss big but most of the time if not all the time traders will always end up broke when they use this approach. 

JC
1514
JC  
mge0rge:

[...] Where am I so far ?

The example which is always used of leverage is a house purchase. For example: you buy a house for $100,000. You put up $10,000 of your own money, and a bank lends you the remaining $90,000. If the value of the house increases by 10%, to $110,000, then you have doubled your investment: you repay the bank their $90,000, and you get back $20,000.

But, equally, if the value of the house falls by 10%, your equity is wiped out. So, yes, leverage is dangerous.

As whroeder1 says, you don't "pay 360 to the broker". In effect, it's a sort of refundable deposit.

Other considerations:

  • Most brokers don't actually have a single rate of leverage. They have a headline rate, and then lower rates on some sensitive markets (and on CFDs)
  • Different brokers have different rules about hedged orders (depending in part on their legal jurisdiction and regulatory body). If you are simultaneously long 10 lots and short 3 lots, then different brokers may require margin based on any of 13 lots, 10 lots, or 7 lots.
  • The fee which you pay to the broker in spread and/or commission is based on the leveraged volume, not the margin amount. If you trade 100K EUR/USD at 100:1 leverage, then the fee you pay to the broker in spread and/or commission is based on 100,000 euros, not 1000 euros. That's one reason why brokers like high leverage and large lot sizes.
mge0rge
60
mge0rge  
JC:

The example which is always used of leverage is a house purchase. For example: you buy a house for $100,000. You put up $10,000 of your own money, and a bank lends you the remaining $90,000. If the value of the house increases by 10%, to $110,000, then you have doubled your investment: you repay the bank their $90,000, and you get back $20,000.

But, equally, if the value of the house falls by 10%, your equity is wiped out. So, yes, leverage is dangerous.

As whroeder1 says, you don't "pay 360 to the broker". In effect, it's a sort of refundable deposit.

Other considerations:

  • Most brokers don't actually have a single rate of leverage. They have a headline rate, and then lower rates on some sensitive markets (and on CFDs)
  • Different brokers have different rules about hedged orders (depending in part on their legal jurisdiction and regulatory body). If you are simultaneously long 10 lots and short 3 lots, then different brokers may require margin based on any of 13 lots, 10 lots, or 7 lots.
  • The fee which you pay to the broker in spread and/or commission is based on the leveraged volume, not the margin amount. If you trade 100K EUR/USD at 100:1 leverage, then the fee you pay to the broker in spread and/or commission is based on 100,000 euros, not 1000 euros. That's one reason why brokers like high leverage and large lot sizes.

The bottom line that one needs to use leverage in trading forex to make any money. If I had 2 million dollars in cash in my account would be a different story as I would be able to trade without leverage and make money. But if I have a 1k account and I risk 3% on each trade that would be 30$/trade, well for 30$ I would be able to buy a very very very very very small lot size that would probably take years if it goes my way to make any profits.

Am I right so far ?

JC
1514
JC  
mge0rge:

Am I right so far ?

Basically, yes.


mge0rge:

But if I have a 1k account and I risk 3% on each trade that would be 30$/trade

It's partly a question of subjective terminology, but a trade volume of $30 isn't what's generally meant by "risking $30". You could have a massive trade size but a really, really tight stop-loss, such that the maximum amount you could lose would be very small despite the huge trade size. Most people would say that the "risk" is the combination of your trade size and your stop, not just the trade size.
mge0rge
60
mge0rge  
JC:
Basically, yes.


It's partly a question of subjective terminology, but a trade volume of $30 isn't what's generally meant by "risking $30". You could have a massive trade size but a really, really tight stop-loss, such that the maximum amount you could lose would be very small despite the huge trade size. Most people would say that the "risk" is the combination of your trade size and your stop, not just the trade size.

Yes, that is right . It depends a lot on how tight is the stop loss.

Thx for the replies and your insights .

whroeder1
15902
whroeder1  
JC: It's partly a question of subjective terminology, but a trade volume of $30 isn't what's generally meant by "risking $30".
Asked, answered and ignored. #1
mge0rge
60
mge0rge  
whroeder1:
Asked, answered and ignored. #1

Ignored what ?

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