100:1 vs. 500:1

[Killer-B]

Stupid (basic) question - but I'm a little confused and hoping for some advice...

My broker just announced that they'll be offering 500:1 margins now - and that got me thinking (again) - just what the differences are - or - pros and cons of having this much leverage ?

I'm *VERY* very very very aware, that the probably the biggest mistake rookie Forex investors make, is poor money management - and over leveraging their accounts -

I was always told to steer clear of such large ratios - sure, you can make some quick cash - but also blow up your account just as fast, if not faster -

Point being - I see several EA's on here - dictating that you MUST have a 400:1 or more accounts... Yet when I look at all the brokerages out there... yes some offer this - others hang in the 100 to 200 range - especially if YOU have a large account (like $100K) they'll only offer like 25:1 margins -

Anyway - Can someone break this down - like for a 5th grader - what the pros and cons are to having a 500:1 account might be? I'm not a "numbers guy" - and so I guess I'm trying to figure out which would suit me best under what conditions and scenarios? - Make some sense? I guess in looking at these "grid EA's" - and seeing the number of orders placed - even with MM being used - if a large series of orders go south - you're gonna get called out... I guess I'm unclear of the mechanics behind all this leverage and why it blows you up-

I have more thoughts/questions - but will leave it at this for now.... (PC, please leave me the option to edit this post pls)

Thanks in advance -

KB

[rsmereka]

I am not a numbers guy either. The way I think of leverage is its link to the margin . The lower the leverage , the more margin the broker will put aside when you open a trade. My live account is 400:1 which means that for every mini I trade, my broker reserves $25 and for every standard lot, my broker reserves $250. If my leverage was 200:1 that would double to $50 and $500 respectively.

If you translate this to risk, I would choose a lower leverage account (broker takes more margin ) if I was trading in such a way that I had the possibility of a large loss. For example: currently the FAP Turbo EA is suffering from multiple large losses. The worst thing you can do under this situation is to have a high leverage account like 500:1.

A high leverage is good for a stable EA that never has large losses.

You know any?

Rick

[Ken Long]

Leverage is NOTHING more than the amount of deposit required to control a position. It does not change anything other than the capital used to hold a position. It does NOT change your risk or your position size.

Your position size is controled by the number of contracts you take. Your risk is controled by your stops. Together they form your money management . Your level of leverage should have no involvement in your money management . You should take the same number of contracts and place the same stops, regardless of the leverage .

Leverage will simply allow you to play with less cash on the table. If you look on the deposit as the position you will disillusion yourself, it is only the controling deposit.

Unlike the stock market, we do not own anything. We are only playing the differences between two entities, one against the other. The only reality is the risk.
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100:1 is standard Forex leverage , up to $100,000. After that many brokerages have further limitations. At greater than 100:1 leverage some brokers will deny leveraged interest, but you will still have to pay it. I havent found this in any of the MT4 brokers I have studied, FXDD and FxPro both offer full interest on all leverage levels, but it does exist. Especialy when you have more than 100K in an account. Thats when all the limitations seem to come out.
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Leverage is very, very powerful when your playing the carry trade and scaling into a long term interest paying position. Imagine, you take an initial position, collecting interest daily, at your prescribed risk level. The position moves in your direction and you move your stop, eliminating risk from the initial position. As you eliminate the risk you are able to take an aditional position with the same risk allowance, collecting full interest on both.

As time goes on and the position grows over weeks and months, constantly raising the stop to lock out risk and lock in profit, the only limitation you face is the size of the deposit required to hold the position. At 100:1 every lot you hold requires a $1000 deposit, at 500:1 it requires $200, at 25:1 it requires $4000. You can see the difference when you are holding many positions long term. High leverage can allow you to build huge positions and collect huge interest on their dime.
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High leverage has much less use when short term and day trading. It simply allows you to overleverage your account easier. It should not change your margin requirements drasticaly, other than to compensate for the lack of deposit. It does not change your risk which is dictated by your stop and position size.

If your stop is 500 pips, that is your risk, not the 100 pips you put up as deposit on a 100:1 account. If your risk is only 50 pips, then you are paying twice your risk for a deposit. No problem if your day trading, but a big problem if your trying to emulate Soros and accumulate the biggest position your margin will allow against some imperiled imperial currency .

[Vania]

Are we using the same broker ? ;-) I trade with Forex-Metal broker and they offer both 1:100 and 1:500 leverage options. I use 500:1 leverage ..You need to know how to handle risk management with high leverage not to blow up your account. I am personally quite successful trading aggressively.