Leverage, RM and MM
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Thread: Leverage, RM and MM

  1. #1

    Leverage, RM and MM

    Credit leverage as well as a margin leverage is essentially the same thing, everyone says so, as it is convenient. This is the lever that allowed by broker to speculate on the market. Here are lots of options, depending on the markets and conditions. But as the RoboForex company provides currently an access to Forex only, let’s look more closely at it.

    In an account opening the customer chooses margin leverage.
    If you look at the calculator featured in an website, you can see that the company provides the following margin lever 1:10, 1:100, 1:200, 1:500.
    First of all, you need to remember that the point value is not changed whichever leverage you chose.
    That is, if a trader has entered the market with 1 lot (100,000 base units), the point value will be still equal to $ 10.

    By way of evidence here are calculator’s screenshots for whom is lazy to check it on website:

    Leverage 1:10 Leverage 1:100
    Leverage 1:200 Leverage 1:500

    As we can see the point value is not changed whichever credit leverage is chosen. In case we enter with one lot which is equal to 100*000 base units, - 1 point is equal to 10 US dollars. But if we enter with 0.1 lot (10*000 base units), - the 1 point is equal to 1 US dollar.

    Thus, the leverage does not affect the risk.
    The one point cost is the same for each leverage, but varies with the lot size.

    As it seen on the screenshots only margin deposit is effected by the margin leverage. The difference a 10 times bigger between the shoulder at 1:10 and 1:100, and between 1:100 and 1:500 - a 5 times. As you can see, to trade with leverage 1:10, we only need a margin of 13098 US dollars at the rate of EUR / USD at 1.3098.

    I’d like also to mention one more thing: as the EUR / USD rate increasing at each point, margin will increase by $ 1. And if it will increase by 100 points, the margin will increase by $ 1,000, and so on. A nice moment only when the rate falls, the margin demand also falls respectively.

    Now, about 1:100, 1:200, 1:500 leverages.
    The pictures show that the margin varies significantly. In the first case we need a margin 1309.8, in the second case, 654.9 dollars, and even less in the third - 262 dollars. (Note: The margin calculation on the website is linked to the actual floating rate, which is not static, but constantly moving, so the calculation is approximate, but generally does not effect to the task.)

    Obviously, with the leverage of 1:100 with a deposit of $ 1,000, we can not enter to the market, because we have not enough capital for margin, and still need to consider the spread, the drawdown of the transaction, in case the price will move in the opposite direction from our transaction. But there is no problem with the leverage of 1:500, because in this case our margin will be 262 dollars. That is from $ 1,000 of deposit less a margin of $262, less a spread of $ 20 (for four-felt quotes for clarity), we will still end up 718 dollars available.

    But with the leverage of 1:500 margin changing is equal 20 US dollars for each 100 points, 100\5=20 US dollars. At a rate of 1:100 for 100 points changing is 100 US dollars. At a rate of 1:200 – 100/2=50 US dollars.

    There is an idea, it is better to take a more leverage. In this case margin will be less. It means then you can trade with a small deposit. And as was mentioned in the topic some companies provides the ability to open an account with the leverage of 1:2000, then the margin will be even less than at 1:200 in 10 times! That is 65.6 US dollars. From a logical point of view, there is no contradiction, all is right.

    But as an experienced trader I should warn you not to use such huge leverages. If tomorrow something unexpected happens, the trader who uses a huge leverage, is a first candidate for margin call.
    If any giant such as Lehman Brothers or MF Global goes into bankruptcy, the brokers will not trust each other and should be able to cut leverage, and especially those who uses huge ones.
    Remember, this event can not be predicted, it can happen as tomorrow as well in ten years. In current times, when the entire states go into bankruptcy, such as Greece, Cyprus, and there is even a long queue for bankruptcy, it is more risky to use a huge leverage.

    There is a new question: which shoulder is correct to use, how much risk to take? After all, we have a different risk with different deposit, on the same leverage and lot.
    That's what the risk management and money management for.
    Last edited by RoboForex Trader; 04-10-2013 at 03:00 PM.

  2. #2

    Risk management and money management.

    There was much written regarding this subject. It’s almost impossible to invent something new in this, so we do not need. You can use the current works for Your benefit. Most important to remember: Loss-making strategy can not be saved by money management as well as risk management. If the patient is more dead than alive, you just pull his death, but the outcome is a foregone conclusion.

    There are many formulas for risk management in Wikipedia and Internet. Everyone says how to count, but no one says how to use them in relation to Forex.
    The ideal formula is chosen on the basis of equity, strategy and permissible drawdown of the deposit. There are three types of drawdown: the historical drawdown which is based on the test results, the admissible drawdown dependent on deposit amount and real drawdown. It is clear that the real drawdown comes ex post.
    Here are no millionaires and wealthy traders, for whom 50K is small change. So, my plan is predicated on the assumption that the majority trades on the bonuses that they have carefully hoarded and earn by actively participating in the forum development.

    From my experience, it's better to use the risk per trade at 1% instead of 2, 5 and 10. 10% is for trader who uses a huge risk for to get the nod with George Soros, Victor Niederhoffer, and so on, but they are unlikely to be interested in this stuff.
    Why is 1%?
    Because most traders including beginners, use the same strategy for multiple currencies. For example, If we use the reversal catching spreads for multiple currency pairs, it profits little we’ll get luck even from the fourth or fifth attempt. Let along that trader beginners who depend more on luck than on strategy.

    The numbers of 4-5% can be used, if the strategy is of very short duration trades (being in the market) and you have a static relationship between loss and profits in favor of profits.
    Therefore, 1% will help you to stay on the market longer before stop out coming.
    The calculation is as follows:
    Deposit * risk/100
    Ie deposit is $ 1,000, the risk of 1%. In this case 1000 * 1/100 = $ 10. Another example with a different risk. Deposit is $ 1000, risk of 2%. 1000 * 2/100 = $ 20.

    On the one hand it would seem that having a deposit of $ 1,000, the risk of $20 is stupid and inefficient, because most peace of the deposit is “floating”, meaning is not used effectively. This is so only if the trader makes only one transaction. In this case, the risk can be raised. If there were made more transactions on one account, deposit can last for a long time and withstand prolonged drawdown in case of significant free equity.

  3. #3

    MM calculation formula.

    As I said before there are many formulas, it can be easy as well as difficult. We do not need difficult ones now to not confuse you.

    Formula 1%
    lot = (X: SL = pip cost) * 10 000

    X = the amount we are willing to lose in a transaction
    SL = the stop value in pips
    Pip cost = pip value multiplied by 10 000

    For example:
    Risk per trade of 1% is $ 5 with $ 500 deposit. The stop is at $ 40, then 5/40 = 0.125 * 10 000 = 1250 so we can enter into a transaction with 1250 units, but RoboForex provides deals with only 1000 units or 2000 units which are 0.01 and 0.02 standard lot. So we rounded down to 1000, or 0.01 lots. If we have more than 1500 units, so we rounded up to 2000, or 0.02 of a standard lot.

  4. #4
    Actually, MM confirm that the two results exactly balanced out each other so that both the value of the business and the capitals overall price of investment are invariant to make use of.

  5. #5
    Quote Originally Posted by zintek View Post
    Actually, MM confirm that the two results exactly balanced out each other so that both the value of the business and the capitals overall price of investment are invariant to make use of
    Keep in mind that In Forex market using good money management, proper risk management and is very important to use safe margin in our account . When a trader trade and also place an order in forex market they must calculate about how to manage the margin and always looking of free margin and also choose the right leverage level. If they do this correctly then they always use safe their balance and also save their account

    May be in first time we as beginner not to think that any more but passage of time we will know how the importance about money management as well as risk management to make us survive in forex market

  6. #6
    Leverage is that allowed the greatest opportunity for traders to young to enroll in the forex market because the former was Leverage very small up to 1:1 and this leads to the capital should be $ 10,000, at least, but now can be traded with a capital of small and easily be Leverage great and also can make big profits

  7. #7
    well, thanks for the review. I prefer to use higher leverage that available. That helps me to save more margin while I open trade. I know that would be involve more risks to me, but as long as I know how to manage my margin, I feel comfortable in using it

  8. #8
    Quote Originally Posted by Grandhis View Post
    well, thanks for the review. I prefer to use higher leverage that available. That helps me to save more margin while I open trade. I know that would be involve more risks to me, but as long as I know how to manage my margin, I feel comfortable in using it
    I'm also the best to do my drawing on the highest leverage exist in the companies I trade the news dangers high even realize a large capital in a short time and then I open a big expense dangers small so true to the time being, use less leverage is 1:500 depending on thecompany you deal with the

  9. #9
    Registered user
    Join Date
    Mar 2013
    Leverage is perhaps the most important decision to take by a trader. Its the leverage that makes Forex trading so interesting and powerful and hence we should chose our leverage judiciously and not greedily. A high leverage not only magnifies our earning potential but also our losing possibility.

  10. #10
    I think leverage is won't give big effect to risk management and money management if we always using using proper lot while we open the position and also limiting the total of open trades while trading. Usually I always prefer to use the highest leverage when I open an account in any forex broker. For Roboforex usually I will use 1:500 since it's the highest leverage here.

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