Jude

Now posing a question to the experts out there.

How does leverage work? and if you're beginning with maybe around $2,000.00, what sort of account should you be starting (mini account, etc etc) and what's a good ratio?

Fire away!

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Steven IS

Leverage, the classic question...

Lets try to explain it as simple as possible with an example:
A leverage of 200:1 means:
Your $1 in your account balance becomes $200 when you open a position. This means that a move on the market has a greater influence on your account, 200 times bigger than actually, this of course works in both ways, negative and positive.

So lets say you open a 1 lot with 200:1 leverage. 1 lot stands for 100,000. So with a leverage of 200 that would mean you use $500. (500*200)

So if your open position then gains 10 pips, you gain $100 with that $500. because it is 1 lot, you gain $10 for every pip. Same goes for losing pips.

I'll leave the rest to Christian

katzenhai2

Correct explanation. But...
I like to see it this way: 1 Lot is always 100,000 units of your account currency, regardless of what leverage you set for your account. I always use the highest leverage, in my account 1:500. Because in my opinion the money what I have on my account is what I can afford to lose. To stop an account to get a margin call, there is the 'stoploss' option in trading.

The advantage of this leverage setting is that you can make more trades on the market at the same time (diversification) before a margin call would occur. There is absolutely not a higher risk on the table if you set the leverage of your account higher! Unless you get a connect problem with your internet provider or your computer goes broken and you can't connect to your broker for several days and have not put in a stoploss order. But serious brokers have telephone support to trade. These are worst case scenarios were backups are always possible. Its like believing that the world as we know can be broke tomorrow and you need to have backups like gold buillions, tinned food etc. But how many people really have these things and how possible is such a scenario?
Never trade with money which you can't afford to lose.

nano11

Steven, you got me confused.....

For 100,000 lot every pip worth $10, so if you trade gain 10 pips you get $100 out of initial invt $500

I've read from babypips (Know Your PS and LS - babypips) and you can correct me if I'm wrong

Steven IS

You're right nano11, thats what you get when you multitask

So to correct myself: 1 lot = 100,000 => $10 for each pip.

So to go further with your $2,000 question Jude:

If you decide to use a high leverage, lets say 200:1 (I read here that someone is using 500:1.. thats rather unique..)

So you can open a maximum of 4 lots or 400,000. that means every pip you gain $40 or lose. Lets say the market goes unexpectedly the other way and you lose 20 pips, thats peanuts if you know a bit about forex.

Anyway, in this story it would mean you just lost 20*40 = $800 and thats not counting the spread and possible commission. Lets say you would roughly have lost $1000 or half of your account balance.


I hope you see the risk of high leverage now, imagine you opened the biggest position with a leverage of 20:1, that would mean: 2,000*20 = 40,000 or 0,4 lots. You can gain or lose $4 for each pip. A 20 pip loss would then mean you only lost $80 (roughly $100).

So to finish with replying to your question: a mini account means you open positions smaller than 1 lot. So it all depends on what risks you want to take, if you wanna trade a full lot, you take big risks with your $2,000 account. I would suggest to use a mini account.

Btw, I use 12:1 leverage myself

phildunn

Most people prefer higher leverage because u can use less margin to trade same lot size.

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Jude

After reading Steve's explanation, things become much clearer. I'd be trading on high leverage too since whatever I'll be starting is whatever amount that I can lose.

Most importantly it's the lot size that matters when you're trading. Correct me if I'm wrong.

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Steven IS

lot size decides how much you can earn.. the risks you are willing to take are related to the leverage..

katzenhai2

Yes, but only if you trade without (at least mental) stops. The real leverage is calculated by your used risk, which someone determines of how many pips he is willing to risk per trade. So with this setup, even if you have your account set to 500:1, it would be only a real leverage of about 12:1 or something like that.

But that implicit that you always trigger your stoploss if needed and not let the losing trades run.

Dan

Now that you understand Leverage you have to figure out your trade size and money management.

You will start with $2,000 balance. If you stick with 0.1 lots for every trade you make, each pip will be worth $1. That's around 2000 pips needed to double your bankroll, or to bust it.

Play with 0.1 lot trades for now. Don't search for the excitement of watching your balance increase&decrease at a huge rate! That's gambling, not trading, and it will ruin your mental ability to make correct decisions and any chance of making profit consistently in this market.

Regards,
Dan

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