Whether to Increase Leverage or Lot Size?

glyder

glyder

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When trading FOREX and wanting to increase size of trades is it better to increase
your leverage or lot size?
I'm not sure if there are pros and cons - if it makes any difference to the spread for example depending on which you choose to increase?

I'd appreciate any thoughts.

Thanks
 
Given the same account balance you cannot increase your leverage without increasing lot size, nor can you increase lot size without increasing leverage. Leverage = Position Size/Account Balance.
 
Rhody Trader said:
Given the same account balance you cannot increase your leverage without increasing lot size, nor can you increase lot size without increasing leverage. Leverage = Position Size/Account Balance.
Click to expand...

Thanks Rhody,
actually my forex account allows leverage to be adjusted 100X to 500 x independently
of Lots .

So eg if I am currently trading 1 lot at 100x leverage, but want to increase size,
will it make a difference to my trading whether I increase to 2 lots or instead to
200X leverage>?
I have read that leverage increases the spread but cannot see how that is.
I suppose carrying losses overnight may incur more cost on leverage??
 
increasing leverage doesnt increase the size you are trading! 1:100 leverage or 1:500 leverage 1 lot is still 10 us $ per point. you are just changing how much margin you have to put up
 
there is no point in using super high leverage as just means you are gona blow out that much easier!

at 1:500 trading 1 lot you will get a margin call after just 20 points!
 
N Rothschild said:
increasing leverage doesnt increase the size you are trading! 1:100 leverage or 1:500 leverage 1 lot is still 10 us $ per point. you are just changing how much margin you have to put up
Click to expand...

Thanks NR,
that explains a lot
So, to be sure I'm clear on this, I take it from what you say that trading 1 lot on 500X leverage gives the same profits per pip as at 100X or even zero leverage?

And Leverage is to take advatage of the brokers money if you have less funds than would be necessary for the size you would like to trade?? (with all the problems of margin call /blow out if it goes against you)
 
Let me clarify something. There's a difference between permissible leverage, which is what your broker allows you to employ, and actual used leverage, which is what I was referring to in my initial response. As N Rothschild points out, changing your permissible leverage does nothing but change the margin requirement. Actual leverage, however, is directly linked to position size.
 
Rhody Trader said:
Let me clarify something. There's a difference between permissible leverage, which is what your broker allows you to employ, and actual used leverage, which is what I was referring to in my initial response. As N Rothschild points out, changing your permissible leverage does nothing but change the margin requirement. Actual leverage, however, is directly linked to position size.
Click to expand...

Thanks Rhody,
I was confused as I thought increasing either would increase gearing. (I was on SB accounts before).
Now I think the main point is for me to remember to stay away from permissable leverage - sounds a dangerous thing,
 
glyder said:
Now I think the main point is for me to remember to stay away from permissable leverage - sounds a dangerous thing,
Click to expand...

Leverage is just a tool. Use it wisely and you will accomplish good things. Use it foolishly and you will undoubtedly be punished.
 
montmorencyt2w said:
This is not a plug for his book, but this chap has some interesting things to say about leverage (like Truman's preacher, he's agin it):

Dirk du Toit (Dr Forex) explains the truth about Leverage

(If you did want to read his book, I'm told that it's findable as a pdf on'tinternet).
Click to expand...

Thanks Mont,

Bottom line for me is stay away from this type of leverage, I wouldnt trade with a credit card, so I won't borrow from a broker either.

The important part of the article for me was this.....

"""A trader decides to buy 5 mini lots EUR/USD, ie €50,000 transaction value and the value of one pip on this transaction is $5.00. Let’s say he makes 100 pips profit which is $500 or 5% of his capital.

Does the flexible margin requirement, generally called “leverage” affect this outcome?

The answer is “no”.

* Leverage = 400:1 = 0.25% = $25 X 5 = $125. After 100 pips move the Trader makes $500.
* Leverage = 200:1 = 0.50% = $50 X 5 = $250. After 100 pips move the Trader makes $500.
* Leverage = 100:1 = 1.00% = $100 X 5 = $500. After 100 pips move the Trader makes $500.
* Leverage = 50:1 = 2.00% = $200 X 5 = $1000. After 100 pips move the Trader makes $500."""""

And This

#

Summary
# What is usually referred to as leverage is actually the margin required expressed as a ratio if you use all the borrowing power the broker will allow.

# Real leverage is determined by dividing your capital into the value of your positions.


# Real leverage can differ from trade to trade and increases with multiple simultaneous trades.

# Margin required has no influence on your risk if you trade properly with modest leverage within your means and is not to be used as a risk calculating principle.
 
Yes, so by his definition, if you had 10,000 in your account, on that position you'd be leveraged 5:1.

If you wanted to have only 1:1 you'd need 50,000 in your account.

It certainly gives pause for thought.

By allowing small account sizes and "generous" margins, brokers are literally inviting people to over-leverage themselves. In addition of course they also encourage frequent trades, i.e. increased transaction costs.
 
N Rothschild said:
there is no point in using super high leverage as just means you are gona blow out that much easier!

at 1:500 trading 1 lot you will get a margin call after just 20 points!
Click to expand...


Hello--This is my first post

I'm sort of confused on this topic so I may be wrong here, but wouldn't the margin call you are describing only happen if the equity in the account was 400$. Used Margin would be 200$, Usable Margin would be 200$, and Equity would be 400$. 200$ usable margin/10$ per pip = 20 pips. So 20 pips the wrong way and you would have margin call. It would be downright silly to trade 100k lots with just 400 in equity.

But what if one had 10k in equity, with the same leverage, it would take 9800$ usable margin/10$ pip = 980 pips in order to get margin call. So in this case with the proper use of stop losses (20 pips is 2% risk) and the right amount of equity to begin with, wouldn't it be acceptable to use 500:1 leverage without worrying about blowing your account?

I am still trying to make sure i fully understand leverage before I open a real account..the way i see it right now, it doesn't matter what your leverage is as long as you only risk a certain % of your capital (<3%) per trade and you have enough equity to begin (no bigger than 10:1 actual leverage), meaning at least 1k for mini lots, and 10k for standard.

Please let me know if I am missing something here : ) Thanks!
 
rafraf127 said:
Hello--This is my first post

I'm sort of confused on this topic so I may be wrong here, but wouldn't the margin call you are describing only happen if the equity in the account was 400$. Used Margin would be 200$, Usable Margin would be 200$, and Equity would be 400$. 200$ usable margin/10$ per pip = 20 pips. So 20 pips the wrong way and you would have margin call. It would be downright silly to trade 100k lots with just 400 in equity.

But what if one had 10k in equity, with the same leverage, it would take 9800$ usable margin/10$ pip = 980 pips in order to get margin call. So in this case with the proper use of stop losses (20 pips is 2% risk) and the right amount of equity to begin with, wouldn't it be acceptable to use 500:1 leverage without worrying about blowing your account?

I am still trying to make sure i fully understand leverage before I open a real account..the way i see it right now, it doesn't matter what your leverage is as long as you only risk a certain % of your capital (<3%) per trade and you have enough equity to begin (no bigger than 10:1 actual leverage), meaning at least 1k for mini lots, and 10k for standard.

Please let me know if I am missing something here : ) Thanks!
Click to expand...
Put it this way.. good luck with placing your stops 20pips from the market, you could be correct about the direction of a currency pair and yet be taken out of the trade by one random large order. Not a clever idea. Believe it or not your risk can actually often be higher with tight stops than it can with wide stops. Mull over that one!
 
virtuos0 said:
Put it this way.. good luck with placing your stops 20pips from the market, you could be correct about the direction of a currency pair and yet be taken out of the trade by one random large order. Not a clever idea. Believe it or not your risk can actually often be higher with tight stops than it can with wide stops. Mull over that one!
Click to expand...

Very True!
 
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