forex - how much leverage to use

[codenaruto]

hello,

i would like to know what leverage level should i select from my forex broker i have decided to go with dukascopy which offers 1:200.

personally, i think 1:100 seems a lot i would gear myself toward something like 1:15.

any input on this would be greatly appreciated.

Thanks

 

[Rhody Trader]

As long as you have enough available leverage to employ your preferred trading strategy, it really doesn't matter - unless there is some cost/opportunity cost to having to post higher amounts of margin.

 

[BobbyBB]

personally, i think 1:100 seems a lot i would gear myself toward something like 1:15.

Good move. Many think that more leverage is better but all it does is offer more rope to hang yourself with.

Somewhere in the 15 to 25:1 is perfect for most. Always think in terms of potential losses, how will you handle a string of them, how will the level of leverage you use effect your trading when you hit that rough patch.

 

[pikolo]

I think 1:25 to 1:50 is the average leverage that anyone could start with. It is best to use a lower leverage if you have not yet mastered the art of trade. You can always change your leverage in the future.

 

[Bruce1]

Only amateur traders think in terms of leverage. Experienced traders and certainly professionals think in terms of risk. A decent risk limit for a professional FX trader would be something like a 95% daily VaR limit of 3% of the capital committed to the trader. The VaR limits might change depending on how the trader has been doing recently. In particular, losing traders get their VaR limits reduced so that they don't blow themselves up trying to get back to even if I am managing their risk.

In most cases leverage isn't clear as they are trading off a pile of cash in a prime brokerage account and as long as there is sufficient margin for the trade there is not an issue. Using leverage as some proxy for risk is just dumb. Levering up 30:1 on the Eurodollar rate 2-years out is not a very risky trade. Levering up 4:1 on a natural gas trade would be a very risky trade.

 

[ffsear]

Only amateur traders think in terms of leverage. Experienced traders and certainly professionals think in terms of risk. A decent risk limit for a professional FX trader would be something like a 95% daily VaR limit of 3% of the capital committed to the trader. The VaR limits might change depending on how the trader has been doing recently. In particular, losing traders get their VaR limits reduced so that they don't blow themselves up trying to get back to even if I am managing their risk.

In most cases leverage isn't clear as they are trading off a pile of cash in a prime brokerage account and as long as there is sufficient margin for the trade there is not an issue. Using leverage as some proxy for risk is just dumb. Levering up 30:1 on the Eurodollar rate 2-years out is not a very risky trade. Levering up 4:1 on a natural gas trade would be a very risky trade.

Pretty much sums up my thoughts on the matter

 

[Shakone]

Only amateur traders think in terms of leverage. Experienced traders and certainly professionals think in terms of risk. A decent risk limit for a professional FX trader would be something like a 95% daily VaR limit of 3% of the capital committed to the trader. The VaR limits might change depending on how the trader has been doing recently. In particular, losing traders get their VaR limits reduced so that they don't blow themselves up trying to get back to even if I am managing their risk.

In most cases leverage isn't clear as they are trading off a pile of cash in a prime brokerage account and as long as there is sufficient margin for the trade there is not an issue. Using leverage as some proxy for risk is just dumb. Levering up 30:1 on the Eurodollar rate 2-years out is not a very risky trade. Levering up 4:1 on a natural gas trade would be a very risky trade.

Only amateurs eh?

Well, if I use leverage of 1:1 I know exactly what is at risk. If you use VaR, and don't know your leverage, you do not know what you're risking. Agreed?

 

[TheLastBear]

Leverage is not the problem. It does not matter if you use 1:1 or 1:1000. What is more important is how you use leverage and that your money management is good. You can calculate how many pips you can allow to move against you and how much capital you should put in each trade.

I know plenty blame leverage on losses, but when it comes down to it the tool is not wrong; the user is to blame.

 

[ph_trader]

traders with large accounts lean to smaller leverage for lower risk but the reward is always good for big accounts, I trade on a 1:500 leverage and thinking of reducing it, though the broker i trade with hotforex offers as much as 1:1000.

 

[LogicalTrader]

Leverage does not matter since it does not determine your pip values. That is determined by your trading size. Use a correct risk% (1 - 3%) is good on each and every trade and you will avoid blowing your account.

 

[TheLastBear]

Leverage does not matter since it does not determine your pip values. That is determined by your trading size. Use a correct risk% (1 - 3%) is good on each and every trade and you will avoid blowing your account.

I think to many focus on leverage and blame it for losses, when indeed they should blame themselves for improper money management. Leverage is a great tool if you know how to use it and a devastating one if you are careless.

 

[Shakone]

Leverage does not matter since it does not determine your pip values. That is determined by your trading size. Use a correct risk% (1 - 3%) is good on each and every trade and you will avoid blowing your account.

In terms of the leverage you actually employ, for those who say leverage doesn't matter, please tell me the following:

If you employ Leverage of 5:1, what % move in the underlying will be needed for you to lose your account? How often does a move of this size occur in your trading instruments?

Leverage 100:1, what % move in the underlying will be needed for you to lose your account? How often does a move of this size occur in your trading instruments?

Leverage 400:1, what % move in the underlying will be needed for you to lose your account? How often does a move of this size occur in your trading instruments?

Then if you've determined those. What is the largest gap on any instrument that you trade since you've been trading?

 

[wackypete2]

People throw around terms such as limits, risk, leverage, percentages, etc... and yet most of them can't reasonably define any of them. What is a 1% or 3% risk of your money? Can you structure a simple trade to guarantee that risk parameter will not fail you? (options traders need not reply).

Peter

 

[LogicalTrader]

The simplest way to look at it is in the example below:
For this example assume the following:
Account equity of $5000
Risk Per Trader 3% = $150

Taking the risk per trade of $150 you then use your preferred analysis method to determine where a reasonable stop-loss level would be placed based on your considered entry point, the markets range (this avoids getting knocked out of your trade by regular price action) and other important levels of support and resistance. The real point of the stop-loss level is to get you out of the market at a point where your analysis would indicate a trade in the opposite direction. If you determined that level would be 30 pips away you then divide your risk per trade by the distance of your stop level to determine the correct volume for your trade. In this case: $150 / 30 = $5, therefore your trading volume = 0.50 ($5 per pip – based on standard lot sizes)

As you can see leverage really only determines the amount needed to open your position and servers as more of a logistical item in your trading. Leverage should not factor into your risk process. Where most new traders go wrong is trading in size that is not appropriate for their account.

Size kills in this market.

 

[Mr. Crabs]

As long as you have enough available leverage to employ your preferred trading strategy, it really doesn't matter - unless there is some cost/opportunity cost to having to post higher amounts of margin.

Agreed the more leverage the merrier just treat the lots like real money and relate it to what you can afford and you won't be taking more risk than you would have trading on low leverage.

It also gives you the opportunity to plunge deep if you're very confident, jumping full in 1:3000 leverage on the EUR dive Monday morning and you would have made 3,000% profits in one day! On the other hand if you bought 10 lots on high or low leverage you're still essentially taking the same exact risk...

 

[Mr. Crabs]

I think to many focus on leverage and blame it for losses, when indeed they should blame themselves for improper money management. Leverage is a great tool if you know how to use it and a devastating one if you are careless.

Absolutely if you were given the choice of 1:10 leverage or 1:100,000 leverage you would be a fool to take 1:10 leverage. No one is forcing you to use up your margin.

 

[duderex]

I'll suggest to open an account with smaller leverage. If you are good with reducing the loss in trading, then you might raise your leverage up bit by bit. But try not to be too hasty to trade in huge leverage before you are able to minimize the lost by 0.8%

 

[bbmac]

What should also be considered re Leverage/risk you use are the performance metrics of the edge/set-up (s) you are using - particularly strike rate achieved (winning trades at a given R:R over a given historical sample size) of that edge/set-up(s.) Notwithstanding the historical strike rate if you know it - Ie you for example have an edge with say a 65% strike rate then over the next 50 trades you are likely to see a 50.9% chance of a consecutive losing run of 4 trades, 21.5% of 5, and 7.9% of 6. 2.8% of 7 and only a 1% of 8...So let's say that you are risking 5%/trade and you encounter a consec losing run 6 - only a 7.9% chance (less than 1 in 10 chance - so possible but not probable) - but it happens......you are now 6 x 5% drawdown from your last account hi...can you handle this ? - will this destabilise you ? ... Bear in mind also that you need to recover 42.9% of your remaining account balance to get back to that last account hi. So the questions you have to ask yourself - is what is your max risk exposure - how likely is it at the leverage/risk you are using and how are you going to accommodate it in your money and risk management such that you 1. stay in the game, and 2. stay in the game without suffering a destabilising loss that affects your ability to carry on trading your edge/set-up (s)

Remember that losses as well as gains are magnified by leverage and that losing trades are not always consecutive but can erode an account over any total sample....Ask also why brokers offers such huge leverage ?



G/L

 

[codenaruto]

Hello,

thank you everyone for your reply. this really helps so it's all about the risk and leverage is more or less arbitrary?

if that is the case you still need to decide what is the appropriate leverage which will allow you to stay in the position and not worry about a margin call.

ex:
using a micro 1000 contract with leverage of 1:500 for example you can initiate a position with $2 i believe. that means im almost always going to get a margin call if im trading on a weekly chart.

so the leverage amount must be big enough to place as many trades as possible based on risk and must also allow me to trade with any worries of margin calls.

if that is the case i believe as BBMAC suggests it really comes down to your system's key stats

is there a math formula to help with this?

 

[TheMeerkat]

i'm not sure if this has already been mentioned, but one thing to note is that the spread that you pay on the swap/rollover could be a function of leverage depending on how your broker works; the higher your leverage, the more spread is charged on the swap/rollover rates. to see an example of how this works, consider the case where you have 1000 EUR in your account and you want to open 0.01 lots of EURUSD:

using 1:5 leverage, you put down a deposit (margin) of 200 EUR and borrow 800 EUR from your broker -- your broker will charge you a fee for borrowing 800 EUR which will be priced in the swap/rollover

using 1:500 leverage, you put down a deposit (margin) of 2 EUR and borrow 998 EUR from your broker -- your broker will charge you a fee for borrowing 998 EUR which will be priced in the swap/rollover

if you are taking a position such that you are credited swap, you will earn more of it if you use lower leverage. moral of the story: don't set your account with excess leverage if you don't need it.

meerkat