What leverage is??? How it works??

[nishant]

Hello Everyone!

I'm grossly confused on what leverage means. Please help me out.

I'm putting an example:- Say, i'm having an account balance of $1133 and trading 100000 units as 1 lot and have a leverage of 100:1. So margin shall be $1000. So what does it basically mean? Does it mean that i can bear a loss till $1000 on that particular position or is that i can face a loss till $133 as the cushion towards my prospective loss before i get a margin call? Say for instance if i go short in GBP @ 2.0300 with a limit of 2.0100. What kind of Stop loss will subject me to margin call? What if i set stop loss at 2.0450? At what rate will i receive margin call and will eventually make Stop loss automatically triggered?

Further what shall be my position if i'm taking leverage of 200:1 instead of 100:1 with the same scenario above? After how many pips going against me from the level of my entry viz 2.0300 will subject me to a margin call? (or at what rate?)

Please help as i'm totally confused with the subject. Else if someone can provide me article links which happens to be exhaustive and makes my query clear.

Regards

[walterw]

	Quote:	nishant
	Hello Everyone! I'm grossly confused on what leverage means. Please help me out. I'm putting an example:- Say, i'm having an account balance of $1133 and trading 100000 units as 1 lot and have a leverage of 100:1. So margin shall be $1000. So what does it basically mean? Does it mean that i can bear a loss till $1000 on that particular position or is that i can face a loss till $133 as the cushion towards my prospective loss before i get a margin call? Say for instance if i go short in GBP @ 2.0300 with a limit of 2.0100. What kind of Stop loss will subject me to margin call? What if i set stop loss at 2.0450? At what rate will i receive margin call and will eventually make Stop loss automatically triggered? Further what shall be my position if i'm taking leverage of 200:1 instead of 100:1 with the same scenario above? After how many pips going against me from the level of my entry viz 2.0300 will subject me to a margin call? (or at what rate?) Please help as i'm totally confused with the subject. Else if someone can provide me article links which happens to be exhaustive and makes my query clear. Regards

Hi Nishant... a 200:1 leverage its not serious on my opinion...

100:1 its ok... let me give you the EFX example as I consider them a nice broker as they have an ECN type platform...

1 contract moves 10.000 units of X currency on x pair... for the sake of simplicty lets say its a USD pair ej. USD/JPY... so in that case each contract will cost you $100 as your leverage is 100:1 wich is $100 x 100 leverage = 10.000 units...

In terms of margin calls it depends on the broker... some work with a 25% others if their is equity for you position... no problem...

should you have at least $200 on acct for each $100 you trade you should be ok... and manage yourself with technical stops... hope this makes some sense... cheers Walter.

[nishant]

thanks Walter!

[PYenner]

Hi Nishant

$1133 is too small to be trading a whole lot, even a half lot would be stressful.
Opening a 1 lot position would take out $1000, leaving $133, but your pip margin would normally take another $10 per pip, depends on the pair, but there is only 13 pips = $130 (typically) to cover pip margin plus drawdown before you get a margin call.

If you trade half lots, entry costs you $500 plus $5 typically per pip of pip margin, say $10 in EURUSD for example, you then have $490 or about 49 pips of drawdown before you get a margin call. But you may need to read your suppliers rules to find out what call limits they apply.

If your supplier uses a 25% margin limit that might be nearly $300 on a $1200 balance and you probably are "allowed" to spend only $900 when opening a trade. So a 1 lot trade might get "insufficient funds" but a 1/2 lot might work.

Any balance below $2500 makes for stressful trading even using just half lots for me. It has been said that nobody has been known to successfully trade a 200:1 account long term, but maybe that is just talk, I don't know. I believe it would be frustratingly slow to trade with and the temptation to overtrade would crash the account for most people. It is said that the average trade lasts 1 to 4 hours and to spend 2-8 hours working for like $20, maybe, is maddening.

Leverage is very much a two edged sword, you need some leverage yet it is also the thing that kills most peoples balances I suspect. I am uncomfortable trading 1 lot on a $5k balance, I have become aware that it is tighter to trade with than it seems. You don't have to get far below $5k before drawdown frightens you and then you start becoming too nervous to leave a trade running. Close out on $20 plus or minus and find the pip margin eats your equity away when you trade like that. Leverage can be a stress mine field.

[PYenner]

If you compare p/l per pip on trades in the same pair on different weeks, you will probably find it paid or cost different $/pip on different weeks. It is not a fixed $/pip, it varies constantly with exchange rates.