What leverage is??? How it works???

[nishantsomani]

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

 

[nine]

Leverage is simple (and different from risk despite the talk about the risk of high leverage tradables).

If you can buy control of $1 of commodity X for $1 from your account then your leverage is 1:1. An example would be buying stock from an account without margin.

If you can buy control of $2 of commodity X for $1 from your account then your leverage is 2:1. An example would be buying stock from an account with margin of 1 dollar for each dollar in your account.

If you can buy control of $200 of commodity X for $1 from your account then your leverage is 200:1. An example would be buying currencies from an account with margin of 200 dollar for each dollar in your account.

More typical futures leverages might be 60:1 to 100:1.



But leverage does not equal risk .... it just give people the possibility of taking too much risk.

A currency moves a lot less as a percentage of its value than a stock ... ie it might move 0.5% on a typical day and 1% on a big day whereas a stock might move 10 times as much. So if you are comparing risks (without paying attention to your stops or your slippage) then a volatility comparison would say:

currency at 10:1 leverage is as risky as stock at 1:1 leverage

(however 200:1 suggests a little more risk potential on the currency )

I hope that helps a little.

 

[TheBramble]

I've always found it a lot simpler to use cash to calculate risk and margin for position sizing.

 

[timm]

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?

In this example, once your position was down $133, that would bring your available margin to zero meaning you could not open any more positions. When you get a margin call or get your position forcibly closed out is dependent on your brokers policies. It does vary for different brokers. For example Oanda's policy is given here: http://fxtrade.oanda.com/fxtrade/margin_rules.shtml

 

[Rhody Trader]

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?

First thing's first. A full lot, 100k unit, position in GBP/USD at a rate of 2.03 means a position value of $203,000. At 100:1 leverage you would need $2030 to enter that trade. Your $1333 would be insufficient. Margin is based on the value of the position in regards to your account currency, not based on the number of units in the trade.

Let's say you have $2030, though, and you put it all up as margin. I believe most brokers will margin call you at 50% of the initial margin (but confirm that with your broker of choice). That means you could lose $1015 before the margin call (and automatic position closure in most cases), which equals 101.5 pips on a 100k position in GBP/USD.

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?)

Assuming that we start with the $2030 account value for the sake of direct comparisson, at 200:1 leverage you would only have to put up $1015 in margin and your margin call point would be $507.50. That means a loss of $1522.50, or 152.25 pips.

 

[nishantsomani]

Thank you so much everyone for providing answers and helping me out..
You have all got my basics turned right now..

Regards