High leverage -gt high risk: Please explain
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Thread: High leverage -gt high risk: Please explain

  1. #1
    Hello Trader community,

    a statement that I ask again and again for several month, because in the forums it is very often written by a higher risk of leveraged investment products.

    I just trade Forex in my feetime, only for pleasure.

    Making it distinct, should I use a leverage of 100 or 400, the difference is apparent for me:

    When I have a trade, 1 lot of EUR/USD using a leverage of 400, I must give a lesser amount of margin to my broker since I would using a leverage of 100.
    The margin I get back from by broker, should I use stop loss limitations.

    So I can calculate or determine my risk with my margin necessity as a basis.

    Or in other words:
    if a EUR/USD exchange brings me 50 pips, volume of 1 lot, I've a profit of $500
    if I'm using a leverage of 1 or 400, my profit is always 50 pips/$500

    or the trade should be stopped out by my SL (eg. RRR = 1), which means I've minus of 50 pips/minus $500.
    If I'm acting with a leverage of 1 or of 400.

    Can someone explain this panic-thought in public space?

    So why a higher leverage should be a higher risk? (Im talking about total risk rather than relative risk)



    greetings,.
    (in your replies please do always use examples using a lotsize of 1)

  2. #2
    In my understanding the reason people refer to utilizing higher leverage as having higher risk is because individuals are using that higher leverage to open positions with the amount of margin.

    As an example lets say you've 1:100 leverage and you are able to open a 1 lot position and 10 pips are equivalent to $100, you now double click your leverage to 1:200 and open a two lot position with the exact same amount of margin. 10 pips are now worth $200 and you have doubled your risk.

    You state in your article to only consult with some 1 lot size position. In regards to some 1 lot size position the risk will be essentially the same as you are using the lot size.

    I hope this helps answer your query.

    If anyone has anything to add or correct please do this.

  3. #3
    Hey Forexmaster.

    Higher leverage = Higher risk That is a FACT! The reason why you don't understand it is because the leverage you are talking about is only your margin need to start a trade. From the post you do understand this concept, but this isn't real leverage. Why is it called leverage by brokers in the first place? In my opinion it's to confuse all new retail traders. So that they don't understand what their leverage is and consequently take on risk, leading to many blown accounts.

    So what's real leverage?

    It is your position size divided by your account size.

    Example:
    Lets say you want to trade 1 lot in EUR/USD. That is a position size of 100 000. To trade at 1:1 leverage, your account size needs to be 100 000.

    Lets say you have $20 000. Your leverage to trade 1 lot is 000 = 5. That is a leverage of 5:1.

    Lets say you've got $400 000. Your leverage to trade 1 lot is now 100 000/400 000 = 0.25. That is a leverage of 0.25:1.

    So why is it riskier to trade with high leverage?

    Lets look at the above examples again.

    You have a 100 000 account. And you also open a position with 1 lot. That is $10/pip. Your leverage is 1:1. To dismiss off your account, you need to shed 100 000/10 = 10 000 pips.

    You have a 20 000 account. And you also open a position with 1 lot. That is $10/pip. Your leverage is 5:1. To dismiss off your account, you need to shed 20 000/10 = two 000 pips.

    Can you find the difference real leverage makes?

  4. #4
    Quote Originally Posted by ;
    Hey Forexmaster.

    Higher leverage = Higher risk This is a FACT! The main reason you do not understand it is because the leverage you're talking about is actually only your margin need to open a trade. From your article this concept is understood by you, but this isn't real leverage. So why can it be called leverage by brokers in the first location? In my opinion it's to confuse most of new retail traders. So they do not know what their actual leverage is and consequently take on risk, leading to many discounted accounts.

    So what is...
    aaaaand you completely missed the OP's point.

    People, not unlike yourself, get uppity and leap around when they hear broker xyz offers n:1 leverage, because according to their busted reasoning the leverage available on an account somehow matters. The risk on any trade has little to do with all the'leverage' an account offers a customer.

    That the OP nailed it. The % of your account in risk is what matters, and doesn't have anything to do with all the so-called leverage available on an account.

    You have differentiated between account leverage with place leverage. Others do not tend to do so. And moreover, speaking about position leverage is just making a mess of things as it would be clearer to speak concerning % of account at risk, as the op has. What value does place leverage have in case you do not take into account the stop space, and therefore the amount at risk?

    Edit: the goal is to be balls-deep in a position leveraged to the maximum... without of your account at risk.

  5. #5
    Quote Originally Posted by ;
    aaaaand you completely missed the OP's point.

    Individuals, not unlike yourself, get all uppity and leap around if they hear broker xyz features n:1 leverage, because in accordance with their own busted reasoning the leverage available on an account somehow matters. The risk on any trade has to do with the'leverage' an account provides a client.

    That the OP nailed it. The % of your account in risk is what matters, and has nothing to do with the so-called leverage available on a single account.

    You've differentiated between account leverage with position leverage....
    Yeah alright studying this again makes more sense today. Thank you for pointing that out. In addition, I agree that it's the percentage at risk that is the variable that is most essential irrespective of leverage. Leverage could be raised without increasing risk.

  6. #6
    .
    From another point of view

    Leverage is charge. Measured deposit's amount.
    If your deposit is $1 and the Brokers provide you charge 1:100 ( 100 times your deposit) you also are able to buy
    around 100 units of currency of your deposit currency. If they provide you 1:400 you are able to buy around 400
    units.

    So, like any sort of charge, nothing wrong to have a whole lot of it. However, its usage s could be harmful.

    By way of instance, if you make 50K annually and a Bank give you a credit card to get a max of 50k, it's
    not wise to max it out, right? If something goes wrong like losing employment, illness, etc
    most likely you'd be in trouble. Same thing with this particular credit to buy currencies. If we utilize
    a lot of it to get impulsive purchases and all a sudden something goes wrong, such as interruptions or matter of the nature
    which our stops will not be admired, we can wind up in trouble and losing more then we wanted.l

    regarding your question..So why a greater leverage should be a higher risk?
    Your assessment is quite correct, the risk incurred in a certain transaction doesn't have anything to do with all the leverage
    provided by the Broker. However, any transaction can be quantified in leverage used in relation to the deposit,
    so that is what is called dangerous. Leverage of 1 of your deposit imply you basically are not currently using charge.
    If you have 20 000 deposit and then buy 20 000 components you're just using all your cash. If you buy
    40 000 then you're using 2 leverage, or 60 000=3 leverage, etc.. . That is the amount we should keep in check.
    The number of occasions yo get in debt depending on your deposit.
    J.

  7. #7
    Trading using leverage carries a high level of risk to your capital, also it is likely to lose more. Only speculate with money you can afford to lose.

    High leverage = high risk because you can theoretically lose over the money you deposited into your account.

    Do not overlook that brokers have automatic systems in place to force liquidation of your location before the leverage make you lose over 100 percent of your account, but you are still accountable in case of a problem occurring during the liquidation process and your account enter debit, thus the higher risk of losing more than what you put into the account.

    This can't occur if you don't use leverage, as you could then just lose 100 percent of your own account but NOT more.

    There is nothing wrong with leverage should you handle risk correctly and use it sensibly.
    The largest problem could arise if volatility and feelings start to come into the picture, then leverage (or a lot of it) can lead to emotional mistakes that quickly escalate to magnified losses...

  8. #8
    Dear Forexmaster

    I am new to this Subject. Could you please clear me what using a leverage means? I've seen this expression before but not clear what it means!

    Thanking you in anticipation.

  9. #9
    Quote Originally Posted by ;
    Dear Forexmaster

    I'm new to this area. Could you please clear me exactly what using a leverage means? I have seen this term before but not clear what it actually means!

    Thanking you in anticipation.
    Hello reddish Herring,
    Leverage: Using borrowed capital to raise your returns from an investment.
    Simple explanation: You land a good deal- lets say computers at $200.
    You know you will sell the machines for $300 profit on your market.
    In your pocket you have just $2000(sufficient to buy 10 machines only)
    You figure out that the profit is too small and opt to borrow $10000 )
    on state that you invest your $2000) from a friend to buy more pieces. STOP
    Your Friend who give you $10000- handed you a leverage of $10000(loan) and demanded you to get
    $2000(margin) of your own money.

    Same thing in trading; the broker gives you a leverage on a certain margin( a specific percentage of the money must be yours) if you earn profit and
    close the transaction, you simply take all of the profit including what you made utilizing the borrowed cash. Should you lose, the broker deducts (his lost money) from your balance. /

    I hope it is clear now. .
    Danny

  10. #10
    Thanks Danny

    You taught like a teacher. I got it. A facility provided by the broker.

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