Hello,
I only trade on practice account, so my words are rather questions than statements. I am a complete noob... This is my knowledge about Leverage and Margin and before I go trading a Real Account I would like the professionals to point out my shortcomings and mistakes. Thank you very much.
Whether High Leverage could wipe out your account or not will depend on the SIZE of your Account, relative to your Position Size and Leverage. Let’s say you have an Account size of $2000 and you want to trade a Mini Lot (10,000 units of base currency). Trading a Mini Lot means that in the case of EUR/USD you want to buy 10,000 Euros with the amount of USD that's current. So, you ask for 1:400 leverage, which is around $25 margin (10,000 / 400), depending on the actual currency rate, as I mentioned. As part of your Risk Management you have to add the spread and the commission to the margin. This will be most likely more than $30. If the market turns against you, then this is ALL the money you can lose (this, I assume, is plain wrong), because the moment this money disappears from your Margin, the broker will stop you out. There will be still $1,970 remaining in your account (here I am most probably wrong - help please). However, by losing $30 you lost more than 1% of your account. The ideal would be to risk UP to 1%. Some big traders like David Paul only risk 0.5% of their account.
Now, if you want to trade a Standard Lot with $2000 account and ask for the same Leverage, then the Margin will jump up to $250. If you want to trade 3 Standard Lots, then this will be $750 plus commission and spread. So, if you’ll get stopped out, then you’ll lose $750 dollars, plus the spread and commission, which is about 40% of your account (this also, I assume, is completely wrong - help please). You make another move like this and you are more or less out. This is where sound Risk and Money management steps in. Also, technical analysis, optimal entries/exits, optimal Stop Loss/Profit Target, Trailing Stop, PATIENCE, fore-testing/back-testing and keeping a Spreadsheet where your win%, average profit, drawdown, profit margin, payoff ratio, profit factor, expectancy, success rate, SQN, Average R, and Total R, etc. will help you to have a better trade. It's my experience that keeping track of these help me to make better trades - at least on my DEMO account.
What else is needed to be understood about High Leverage is that it comes with Low Margin. Low Margin leaves tight room for error. For example, $25 margin leaves almost no room for error and in a Highly Volatile Market Hours (especially beginning/ending of the weak, opening/closing hours) this amount will be taken out in no time. That is why, before entering a trade you will have to learn about your Trading Environment. In other words, Volatility has to be considered and in accordance with Volatility and Account Size you will ask for Optimal Leverage. You can practice this on a DEMO Account and later on a Real Account, but starting out with Micro Lots.
What you might not know about Margin is that it is the Money that you trade with. So, by asking for Leverage a portion of your Account is placed into the Margin that will be engaged in trading. It's not your whole Account that you are trading with in case of having a Leverage.
Another thing. Low Leverage can also wipe out your account. Consider this. If you have a $2000 Account size and want to trade a Mini Lot with 1:10 leverage, then your Margin will jump up to $1000. This means that if the Market turns against you and you keep hoping for a better trade without any rational prospects, then you will easily lose this $1000. So, basically it ALL comes down to sound Money and Risk Management – not High Leverage. If it is clear to you how much you Risk and how much Margin you get, and how Volatile the market is, and what Strategies to use in Trending vs Breakout vs Ranging Market, then you’ll be fine, because you will not make an erroneous move out of ignorance and greed.
Yet, another thing to consider. Don't open an Account with a broker unless you are absolutely certain about the size of the Positions you want to trade, the max/min Margin you are willing to have, therefore the Leverage you want to ask for. This will determine your Account Size. At least, this is how I would personally do it, because I would not trust ALL my money with the broker. They are hardly any decent brokers, at least this is what my research shows. So I would aim at the OPTIMAL amount of money that I would deposit with him and the rest I would keep in my bank.
There are two good posts that I know of to read about Balance, Equity, Margin, Free Margin, Margin level:
1)The first is from mrkam (2nd post) on this page:https://www.forexfactory.com/showthr...755&page=1&rep
2) The second is from Jexter (2nd post) on this page: https://www.forexfactory.com/showthread.php?t=459141
Once again, I am a new to Forex, and I only trade on DEMO account. I would like to be corrected if there is anything wrong with my understanding of Leverage. All good answers/corrections are appreciated and very welcome. Also, if nothing else, rookies can learn from the mistakes I made in this article, especially about money at risk on leverage. I marked the places I suspect to be wrong.
Thank you very much in advance.
I only trade on practice account, so my words are rather questions than statements. I am a complete noob... This is my knowledge about Leverage and Margin and before I go trading a Real Account I would like the professionals to point out my shortcomings and mistakes. Thank you very much.
Whether High Leverage could wipe out your account or not will depend on the SIZE of your Account, relative to your Position Size and Leverage. Let’s say you have an Account size of $2000 and you want to trade a Mini Lot (10,000 units of base currency). Trading a Mini Lot means that in the case of EUR/USD you want to buy 10,000 Euros with the amount of USD that's current. So, you ask for 1:400 leverage, which is around $25 margin (10,000 / 400), depending on the actual currency rate, as I mentioned. As part of your Risk Management you have to add the spread and the commission to the margin. This will be most likely more than $30. If the market turns against you, then this is ALL the money you can lose (this, I assume, is plain wrong), because the moment this money disappears from your Margin, the broker will stop you out. There will be still $1,970 remaining in your account (here I am most probably wrong - help please). However, by losing $30 you lost more than 1% of your account. The ideal would be to risk UP to 1%. Some big traders like David Paul only risk 0.5% of their account.
Now, if you want to trade a Standard Lot with $2000 account and ask for the same Leverage, then the Margin will jump up to $250. If you want to trade 3 Standard Lots, then this will be $750 plus commission and spread. So, if you’ll get stopped out, then you’ll lose $750 dollars, plus the spread and commission, which is about 40% of your account (this also, I assume, is completely wrong - help please). You make another move like this and you are more or less out. This is where sound Risk and Money management steps in. Also, technical analysis, optimal entries/exits, optimal Stop Loss/Profit Target, Trailing Stop, PATIENCE, fore-testing/back-testing and keeping a Spreadsheet where your win%, average profit, drawdown, profit margin, payoff ratio, profit factor, expectancy, success rate, SQN, Average R, and Total R, etc. will help you to have a better trade. It's my experience that keeping track of these help me to make better trades - at least on my DEMO account.
What else is needed to be understood about High Leverage is that it comes with Low Margin. Low Margin leaves tight room for error. For example, $25 margin leaves almost no room for error and in a Highly Volatile Market Hours (especially beginning/ending of the weak, opening/closing hours) this amount will be taken out in no time. That is why, before entering a trade you will have to learn about your Trading Environment. In other words, Volatility has to be considered and in accordance with Volatility and Account Size you will ask for Optimal Leverage. You can practice this on a DEMO Account and later on a Real Account, but starting out with Micro Lots.
What you might not know about Margin is that it is the Money that you trade with. So, by asking for Leverage a portion of your Account is placed into the Margin that will be engaged in trading. It's not your whole Account that you are trading with in case of having a Leverage.
Another thing. Low Leverage can also wipe out your account. Consider this. If you have a $2000 Account size and want to trade a Mini Lot with 1:10 leverage, then your Margin will jump up to $1000. This means that if the Market turns against you and you keep hoping for a better trade without any rational prospects, then you will easily lose this $1000. So, basically it ALL comes down to sound Money and Risk Management – not High Leverage. If it is clear to you how much you Risk and how much Margin you get, and how Volatile the market is, and what Strategies to use in Trending vs Breakout vs Ranging Market, then you’ll be fine, because you will not make an erroneous move out of ignorance and greed.
Yet, another thing to consider. Don't open an Account with a broker unless you are absolutely certain about the size of the Positions you want to trade, the max/min Margin you are willing to have, therefore the Leverage you want to ask for. This will determine your Account Size. At least, this is how I would personally do it, because I would not trust ALL my money with the broker. They are hardly any decent brokers, at least this is what my research shows. So I would aim at the OPTIMAL amount of money that I would deposit with him and the rest I would keep in my bank.
There are two good posts that I know of to read about Balance, Equity, Margin, Free Margin, Margin level:
1)The first is from mrkam (2nd post) on this page:https://www.forexfactory.com/showthr...755&page=1&rep
2) The second is from Jexter (2nd post) on this page: https://www.forexfactory.com/showthread.php?t=459141
Once again, I am a new to Forex, and I only trade on DEMO account. I would like to be corrected if there is anything wrong with my understanding of Leverage. All good answers/corrections are appreciated and very welcome. Also, if nothing else, rookies can learn from the mistakes I made in this article, especially about money at risk on leverage. I marked the places I suspect to be wrong.
Thank you very much in advance.