About leverage. There are many new traders who really don’t have a
clue what leverage really means, how to know if it’s good, bad, better
or how to even know the impact on your real world trading.
So … here is a brief but hopefully still easy to understand lesson on it.
Mic (imaginary trader) for example, has said he wants to trade (in fact I think said HAS to
trade) micro lots for his system to work.
In this last post, in the points to consider, wants 500:1 leverage but
will consider 300:1.
Ok … consider this. Based on what you have said, neither leverage
would even make a difference in your trading, up to and including 100:1!
How do I know this? Because I know how leverage works and how much
of it is actually used in trading for most people.
Here is the math on a Micro Account so you can see how it works.
At 500:1 … a Micro lot costs $2.70 to hold $1000 in trade (within a dime or so).
At 400:1 … $3.38 at 300:1 $4.50 at 200:1 $6.75 and 100:1 $13.50.
Got all that?
So, if you’re saying “I want to open my account with $500 but have 500:1
and I MUST trade micro lots, it tells me you plan to trade LESS than one full
MINI lot of $10,000.
Let’s look at it though as IF you were going to trade a FULL MINI LOT which
is 10 (Ten) Micro lots.
You have $500 in your account. You’re going to trade 10 (ten) Micros
Here’s the effect of the leverage … or LACK of it.
At 500:1 you would have $27 of your money holding the trade .. .the Margin.
At 400:1 you would have $33.80 of Margin (your money) holding those 10 micro lots.
At 300:1 you have $45.00 of Margin being used. At 200:1 $67.50 holding the
trade open. At 100:1 you have $135.00 holding the trade.
WHICH IS BETTER? Do you (any reader) know which is better for YOU?
First, let’s face it. Out of $500 — NONE of those amounts is significant to your
account, in that in ALL CASES, you have plenty of money LEFT in your account
to absorb some movement AGAINST your trade.
If the trade goes into PROFIT … then none of those leverages is even worth
talking about, because Margin only comes into play if it goes AGAINST YOU.
So, again, which one is BETTER?
There is ONE OTHER TIME margin becomes an issue, other than when the
trade is going AGAINST your position.
That’s when you want to trade HEAVIER .. but your leverage is higher than
you have money to put on the trade.
Example … with the $500 account, if you wanted to trade 100 Micro Lots,
(10 Minis) up to the 300:1 YOU COULD. Because 100 lots would still add
up to less than the $500 account balance and STILL HAVE MONEY LEFT
to absorb some movement against your trade. Not much .. but some.
At 200:1 and less, you COULDN’T because the required margin would
take MORE than $500 to put that many lots on.
But other than wanting to trade “Account Killer Levels” of lots, we are
then back to the question of … WHICH IS BETTER THEN, FOR THE TRADER?
Remember … the MARGIN HOLDING THE TRADE IS YOUR MONEY THAT IS
LEFT AFTER YOU MARGIN YOUR ACCOUNT OUT.
So, if you put on those 10 micro lots and you had say an account at each
margin level from 500:1 to 100:1 … and all of your accounts margined out,
you would have THE MARGIN HOLDING EACH TRADE LEFT AFTER
Now which one do you want? At 500:1 you’d have $27 left. At 100:1 $135
of your $500 would still be left. Because the Margin is YOUR MONEY.
I’ve had traders tell me … “But I don’t plan on margining out. I just want
as little of MY money used to open the trades as possible.”
Here is some real world trading advice.
If you don’t plan on margining out your account .. then DON’T.
And if that’s the case, the the MARGIN offered doesn’t make any difference
at all UNLESS … you plan to try putting on MORE LOTS than the lower margin
levels will let you … and then you BETTER PLAN on how to avoid margining
your account out or you will.
We USE that higher level of leverage to work our Loss Recovery System.
Most people just see leverages listed and “higher is better … right?” without
understanding what it really is, if they will every really use it and how it can
Hope This Has Helped!