Does Higher Leverage Mean Higher Profit in a Trade for the Same Amount of Points

[erwtg4]

I created two identical demo accounts in MetaTrader 5 to test this. Each account had $1,000 initial balance. The only difference between them was the leverage amount. The first one had 25:1 and the second one 100:1. I then opened a new trade in each account at (0.02 lot) volume and put the Take Profit line at 500 points. After both closed with profit, I realized they both made the same exact amount of profit ($10). I was expecting the account with 100:1 leverage to make 4 times more than the account with 25:1 leverage. I was clearly wrong.

So if higher leverage doesn't increase your profit, what does it do exactly? Can someone please explain this to me? Thank you.

[Fernando Carreiro]

erwtg4: I created two identical demo accounts in MetaTrader 5 to test this. Each account had $1,000 initial balance. The only difference between them was the leverage amount. The first one had 25:1 and the second one 100:1. I then opened a new trade in each account at (0.02 lot) volume and put the Take Profit line at 500 points. After both closed with profit, I realized they both made the same exact amount of profit ($10). I was expecting the account with 100:1 leverage to make 4 times more than the account with 25:1 leverage. I was clearly wrong. So if higher leverage doesn't increase your profit, what does it do exactly? Can someone please explain this to me? Thank you.

No, leverage does not affect your profit nor your loss, given the same volume and price difference.

Leverage only affects the required margin for placing an order. It is a kind of "bank loan" to facilitate placing a trade.

• What is Margin?
• Forex Leverage and Margin Explained
  
• The Relationship Between Margin and Leverage

[erwtg4]

Fernando Carreiro #:

No, leverage does not affect your profit nor your loss, given the same volume and price difference.

Leverage only affects the required margin for placing an order. It is a kind of "bank loan" to facilitate placing a trade.

• What is Margin?
• The Relationship Between Margin and Leverage

So then the question becomes:

If leverage size does not affect my profit/loss level, and if I'm always ONLY trading small position sizes ($1,000 account, 0.02 lot position size), why do I need to use leverage at all anymore?

PS. At the moment my leverage is 25:1, I don't see the benefit of it. Please help me understand. Thank you.

[Fernando Carreiro]

erwtg4 #: So then the question becomes: If leverage size does not affect my profit/loss level, and if I'm always ONLY trading small position sizes ($1,000 account, 0.02 lot position size), why do I need to use leverage at all anymore? PS. At the moment my leverage is 25:1, I don't see the benefit of it. Please help me understand. Thank you.

As I a have already stated, leverage affects your required margin. Follow the links I provided and research what margin and and leverage are about.

[erwtg4]

Fernando Carreiro #:

As I a have already stated, leverage affects your required margin. Follow the links I provided and research what margin and and leverage are about.

Thank you Fernando.

[Fernando Carreiro]

Example on EUR/USD a position of 0.01 Lot :

• leverage 1:30, the margin required is : 33,33€
• leverage 1:500, the margin required is : 2,00€

Example on EUR/USD a position of 1.00 Lot :

• leverage 1:30, the margin required is : 3333,33€
• leverage 1:500, the margin required is : 200,00€

I added one more link to my previous post about Leverage and Margin.

[erwtg4]

Fernando Carreiro #:

Example on EUR/USD a position of 0.01 Lot :

- with leverage 30, the margin required is : 33,33€
- with leverage 500, the margin required is : 2,00€

Example on EUR/USD a position of 1.00 Lot :

- with leverage 30, the margin required is : 3333,00€
- with leverage 500, the margin required is : 200,00€

I added one more link to my previous post about Leverage and Margin.

Thank you again Fernando. And thanks for the links.

So am I correct to assume that if I have a $1,000 account and my trading position sizes are always only 1 or 2 micro lots, I'd be fine with a 5:1 or a 10:1 leverage? And under those circumstances, I have nothing to gain from a higher leverage like 25:1 or 100:1?

I'm coming to the conclusion that contrary to what people think (they think high leverage is bad), that having a high leverage can bring your trading risk down IF your trading position sizes are small.

[Fernando Carreiro]

erwtg4 #: Thank you again Fernando. And thanks for the links. So am I correct to assume that if I have a $1,000 account and my trading position sizes are always only 1 or 2 micro lots, I'd be fine with a 5:1 or a 10:1 leverage? And under those circumstances, I have nothing to gain from a higher leverage like 25:1 or 100:1? I'm coming to the conclusion that contrary to what people think (they think high leverage is bad), that having a high leverage can bring your trading risk down IF your trading position sizes are small.

If you have a leverage of 1:5 and you wish to place an order for 0.01 lot of EUR/USD then your margin requirement would be €200, leaving you with only $800 to cover any losses in price changes.

Brokers offer various leverage levels at no extra cost, so there is no real advantage to choosing 1:5 over 1:100 if you practice proper position sizing.

And yes you are correct, leverage is neither bad nor good. It only becomes "bad" when traders start calculating the volume size purely based on margin requirements (which is wrong) and not on the stop loss size (which is the correct way).

[erwtg4]

Fernando Carreiro #:

If you have a leverage of 1:5 and you wish to place an order for 0.01 lot of EUR/USD then your margin requirement would be €200, leaving you with only $800 to cover any losses in price changes.

Brokers offer various leverage levels at no extra cost, so there is no real advantage to choosing 1:5 over 1:100 if you practice proper position sizing.

And yes you are correct, leverage is neither bad nor good. It only becomes "bad" when traders start calculating the volume size purely based on margin requirements (which is wrong) and not on the stop loss size (which is the correct way).

I think I'm finally getting this. So here's what I'm going to do: For a $1,000 account, I'm going to use a 50:1 or maybe even 100:1 leverage. But I'll never trade a position size larger than 1 or 2 or at max 5 micro lots. And I'll always have a Stop Loss which triggers at say 1% of my account. So for a $1,000 account the Stop Loss would be around $10. Thank you again Fernando.

[erwtg4]

Fernando Carreiro #:

And yes you are correct, leverage is neither bad nor good. It only becomes "bad" when traders start calculating the volume size purely based on margin requirements (which is wrong) and not on the stop loss size (which is the correct way).

May I ask one more question not related to leverage? As I said in the original post, on a new $1,000 demo account, when I open a new trade at 0.02 lot and let the Take Profit hit 500 points, it gives me exactly $10. But if I do the exact same thing with a $2,000 account, the profit will exactly be the same $10. How can this be? Shouldn't a twice as large account create twice as large profit from the same 500 points?

[Fernando Carreiro]

erwtg4 #: May I ask one more question not related to leverage? As I said in the original post, on a new $1,000 demo account, when I open a new trade at 0.02 lot and let the Take Profit hit 500 points, it gives me exactly $10. But if I do the exact same thing with a $2,000 account, the profit will exactly be the same $10. How can this be? Shouldn't a twice as large account create twice as large profit from the same 500 points?

Again, you mixing apples and oranges. If you buy a used car for $1000 and then sell it for $1200, you make $200 profit. Does it really matter if you have $2000 or $200000 in savings in your bank account?

No. The amount you have in your account does not matter. What matters is how much you invested and any potential losses you may incur.

If you plan to risk 1% of your account balance on each trade then you need to adjust the volume accordingly.

So, if a stop-loss of 500 points for 0.02 lots gives you a potential loss of $10 (which is 1% of $1000), then for a balance of $2000, you would place an order of 0.04 lots, so that the same 500 points would give you a value of $20 (1% of $2000).