Increase lots or leverage

[Trevman]

Doesn't increasing lots have the same effect as increasing leverage?

[fxkiwi]

In a word, yes. Increasing your leverage allows you to trade more lots with the same margin however the profit/loss in your account will be the same per lot regardless of leverage.

e.g. one 100k lot worth $10/pip at 100:1 leverage is still only worth $10/pip if you use 400:1 leverage. The only difference is one required $1000 margin and the other $250.

This is why money management is so important. I only risk a max of 2% of my account per trade. So if I had an account balance of $10000 then I would only risk $200 or 20 pips on 1 full lot. If that lot required $250 or $2000 margin does not make any difference to me as the max risk is the same.

fxkiwi

[ianm777]

Originally Posted by fxkiwi

In a word, yes. Increasing your leverage allows you to trade more lots with the same margin however the profit/loss in your account will be the same per lot regardless of leverage.

e.g. one 100k lot worth $10/pip at 100:1 leverage is still only worth $10/pip if you use 400:1 leverage. The only difference is one required $1000 margin and the other $250.

This is why money management is so important. I only risk a max of 2% of my account per trade. So if I had an account balance of $10000 then I would only risk $200 or 20 pips on 1 full lot. If that lot required $250 or $2000 margin does not make any difference to me as the max risk is the same.

fxkiwi

Thanks for a most clear explanation!!

Howecer why would anyone consider taking less than the maximum margin?

ianm
PS yeah I know shows how little I understand my finances ??

[cornellj]

If your original position is 1% of your margin, at 100-1 leverage your potential loss is only 1% of your margin at 100pips negative against you. For instance on a US$ 10 000 account you will place a minilot of US$100. There is enough movement (volatility) in the markets monthly to make 10-12% profit on your margin using only 1% of your margin per trade. By using larger stops and hedge positions you can easily reach 600pips profit per month, by increasing the number of positive trades you have.

It is not necssary to increase your lotsize to make profits. For instance one standard lot of US$1000 on a US$10 000 account puts at risk 10% of your margin. At 100-1 leverage you now have 20pips to work with before you lose 2% of your margin. No-one is able to precisely predict the market and most of your trades will be stopped out at a 20pip stoploss. I believe you can manage all those trades to profits if you use wider stops and smaller percentages of margin per trade.

If you limit the risk percentage on your account with a stoploss position, the bigger the percentage of your margin you place on the trade the smaller pipmovement the stoploss will need to be. On a trade of US$ 1000 20 pips equals 2% of your margin against US$ 100 200pips equals 2% of your margin on a US$10000 margin account.

In the second example you can still make 200% profit on your account per year with a lot less risk if you use the market volatility in your favour..

[ianm777]

Many thanks for your hard work in getting me to understand the margin dilemma.

Have to say that a few more reads are going to be necessary for it to sink in but I do expect to get there this time.

many, many thanks,
ianm

[MickMason]

Originally Posted by cornellj

If your original position is 1% of your margin, at 100-1 leverage your potential loss is only 1% of your margin at 100pips negative against you. For instance on a US$ 10 000 account you will place a minilot of US$100. There is enough movement (volatility) in the markets monthly to make 10-12% profit on your margin using only 1% of your margin per trade. By using larger stops and hedge positions you can easily reach 600pips profit per month, by increasing the number of positive trades you have.

It is not necssary to increase your lotsize to make profits. For instance one standard lot of US$1000 on a US$10 000 account puts at risk 10% of your margin. At 100-1 leverage you now have 20pips to work with before you lose 2% of your margin. No-one is able to precisely predict the market and most of your trades will be stopped out at a 20pip stoploss. I believe you can manage all those trades to profits if you use wider stops and smaller percentages of margin per trade.

If you limit the risk percentage on your account with a stoploss position, the bigger the percentage of your margin you place on the trade the smaller pipmovement the stoploss will need to be. On a trade of US$ 1000 20 pips equals 2% of your margin against US$ 100 200pips equals 2% of your margin on a US$10000 margin account.

In the second example you can still make 200% profit on your account per year with a lot less risk if you use the market volatility in your favour..

I don't want to belabor the issue but isn't that method of calculation a bit like scratching your left ear with your right hand (ie awkward and clumsy)?

What can be simpler than:

Account balance: 10k
Maximum risk: 2% (I think 1% for beginners is ample but that's a moot point) = $200
Trade size: $200 divided by stop loss (which will vary on each trade depending on market conditions/indicators etc)

eg Stop loss on this trade is 40pips, therefore trade size is 50k ($5 per pip)

Why mess around working out margin percentages, it all seems a bit back-to-front to me?


Mick

[yasirdxb]

Thats what I'm wondering! no matter what leverage your broker offers

,just be sure about two things.

1) maximum risk/trade. for ex:- 2%

2) overall risk exposure. for ex:- 10%

Now you are not gonna risk more than 2% in any of the trade and you wont risk more than 10% of your account at any given time in all of the trades. in this case you may take a maximum of 5 trades each has a risk of 2%. make sure you are not taking correlated trades. ie:- in a long eur/usd and long gbp/usd trades a time,chances are that you will end up in risking 4% in a single trade! divercification is a key element in successful trading.

ps: use the calculation in mick's post to find howmuch you can risk in a trade. let the technical picture tell you where to place the stop and adjust the position size of your trade. Great profits comes when we decrease the risk and increase the position size!


Yasir.

[comingback]

Hey Yasir,

How can you increase the position size and decrease the risk at the same time? I am sure you mean increase the position size and narrow the stop loss, which of course doesn't decrease your risk. If anything, it increases it because the probability of you being stopped out increases.