leverage!

nickohorny · Mar 1, 2012

Hi, newbie here trying to understand more on leverage.

If I was to have a $1,000 account wtith 100:1 leverage does this then mean I can actually trade a maximum of 1 standard lot or 10 min lots?

1,000 x 100 = 100,000

1 standard lot = 100,000
1 mini lot = 10,000

Please let me know if I am on right track!!

Also, please see the example below to see if I am getting the gist of it:

Day 1, trade 10 mini lots. Lose a trade of 10 pips on EUR/USD. so account is down $100 and balance is $900

Day 2, can only trade a max of 9 mini lots and NO standard lot due to current balance.

Rhody Trader · Mar 1, 2012

You're actually on track, but with one little correction.

Your 100:1 leverage applies to the value of the position you take, not the unit size. It's an important distinction. If EUR/USD is at 1.3000, then a standard lot has a value of $130,000. It would require 130:1 leverage to trade that on a $1000 account. Now, since a standard lot of USD/JPY does have a $100,000 value, you could trade that.

Albert Carey · Mar 2, 2012

nickohorny said:
Hi, newbie here trying to understand more on leverage.

If I was to have a $1,000 account wtith 100:1 leverage does this then mean I can actually trade a maximum of 1 standard lot or 10 min lots?

Yes but only when USD is the base currency. If it is not, you can buy more or less depending on exchange rate.

nickohorny · Mar 2, 2012

I see thanks guys.. leveage is dependant on current exchange rate.

One last thing - why would you use the leveage? I mean if i was to have a $1,000 account, and wanted to be conservative and just risk 2% a trade as advised by most, And say my trade had a 10 pip stop, then my position size would be:

2 minilots. so if 10 pip stop is hit i stand to lose $20 (2% of my account balance)

So why would i decide to go and use full leveage and trade say 10 mini lots and result in a 10% loss instead?
Just curious, am I being too conservative? should i be looking to take advantage of the leveage offered?

Thanks in advance

Rhody Trader · Mar 2, 2012

nickohorny said:
I see thanks guys.. leveage is dependant on current exchange rate.

That's not actually what we said.

One last thing - why would you use the leveage? I mean if i was to have a $1,000 account, and wanted to be conservative and just risk 2% a trade as advised by most, And say my trade had a 10 pip stop, then my position size would be:

2 minilots. so if 10 pip stop is hit i stand to lose $20 (2% of my account balance)

So why would i decide to go and use full leveage and trade say 10 mini lots and result in a 10% loss instead?

You trade the position size appropriate for the risk you're willing to take. That's it. You don't max out your position size just because you can. That's how traders blow themselves up.

nickohorny · Mar 2, 2012

Rhody Trader said:
That's not actually what we said.

I am still confused then lol, suppose what i mean is it is dependent on the currency pair you are trading? As with EURUSD, EUR is the base currency with this pair.

You trade the position size appropriate for the risk you're willing to take. That's it. You don't max out your position size just because you can. That's how traders blow themselves up.

Yes thanks, that's what I was thinking, why on earth would you want to trade with such huge position sizes and risk losing a whack of your account.

nickohorny · Mar 2, 2012

Rhody Trader said:
That's not actually what we said.

I am still confused then lol, suppose what i mean is it is dependent on the currency pair you are trading? As with EURUSD, EUR is the base currency with this pair.

Rhody Trader · Mar 2, 2012

Yes, base currency and it's exchange rate to your account currency. If you're trading a USD based pair like USD/JPY, then obviously the exchange rate to the base is 1:1. If you're trading any other pair, then it's that pair's base currency to the USD, regardless of whether the USD is the quote currency or not. By that I mean whether you are trading EUR/USD or EUR/JPY, the value of the position is based on the EUR/USD exchange rate.

toomuch · Mar 6, 2012

You are close but every cross has a different pip value. Go jump on a pip value calculator (there are tons on the internet) and see what pairs are higher/lower than the standard

leverage!

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